Question

Cost of Capital (WACC):
1. Company XYZ’s financing plans for next year include the sale of bonds with a 10% coupon rate. The company believes it can sell the bonds at a price that will provide a yield to maturity (YTM) of 12%. If the company’s marginal tax rate is 35%, what’s the company’s after-tax cost of debt capital?

2. Company ABC just financed with a 30-year bond issuing today. The bond sold at $515.16 with semiannual coupon payments. The coupon rate is 6%. Par value is $1000. If ABC’s marginal tax rate is 40%, what is the firm’s component cost of debt for purpose of calculating its WACC?

3. Firm A will issue new preferred stock at $100 which pays $10 per share each year. The floatation cost is 2.5% of the issuing price. Firm A’s marginal tax rate is 40%. What’s the after-tax cost of preferred stock?

4. Assume rf = 8%, rm = 13%, and bi = 0.7 for a given stock X. Firm X has a tax rate of 40%. What’s the after-tax cost of equity for this firm?

5. The current stock price of firm A is $50. The dividend of the stock will grow at 8% annually. Firm A has just paid a dividend of $1.852. Firm A’s marginal tax rate is 40%. What’s the cost of equity of firm A?

6. Suppose Firm B has its target capital structure as follows. Firm B has a tax rate of 40%.
Instrument Market Value ($mil.) Cost of capital
debt 45 10%
preferred Stock 2 10.3%
common equity 53 13.4%
What’s the WACC (Weighted Average Cost of Capital)?

Please provide full solutions for these problems, so I can model them for future problems, thank you :)

Answer 1

1) YTM = 12% = 0.12

tax rate , t = 35% = 0.35

after tax cost of debt , k = YTM*(1-t) = 12*(1-0.35) = 7.8%

2)