1. A company issues 15-year, $1,000 par-value bonds,with a coupon rate of 5%. The bonds are sold for $619.70. The tax rate is 30%.Compute the cost of debt before taxes and after taxes.
2. Suppose a company issues common stock to thepublic for $25 a share. The expected dividend is $2.50 per share and the growthin dividends is 8%. If the flotation cost is 10% of the issue proceeds, computethe cost of external equity, re.
Problem 3
Calculate the cost of preferred stock (rPS) withthe given information:
Par Value = $200
Current Price = $208
Flotation Cost = $16
Annual Dividend = 12% of Par
4. A firm expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $32.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of equity from new common stock (re)?
5. Suppose you are informed that a company expects to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company’s WACC if all the equity used is from retained earnings?
