A company's perpetual preferred stock currently sells for $92.50 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the issue price. What is the firm's cost of preferred stock? 8.22% 8.65% 9.01% 9.10% 9.56%

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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**The Collins Group: Estimating Weighted Average Cost of Capital**

The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm's weighted average cost of capital. Below is the balance sheet and other relevant information.

**Balance Sheet**

- **Assets**
  - Current assets: $38,000,000
  - Net plant, property, and equipment: $101,000,000
  - Total assets: $139,000,000

- **Liabilities and Equity**
  - Accounts payable: $10,000,000
  - Accruals: $9,000,000
  - Current liabilities: $19,000,000
  - Long-term debt (40,000 bonds, $1,000 par value): $40,000,000
  - Total liabilities: $59,000,000
  - Common stock (10,000,000 shares): $30,000,000
  - Retained earnings: $50,000,000
  - Total shareholders' equity: $80,000,000
  - Total liabilities and shareholders' equity: $139,000,000

**Additional Information**

- The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00.
- The beta is 1.25.
- The yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%.
- The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years.
- The firm's tax rate is 40%.

**Assignment**

Answer each of the Questions in the two and a half hours permitted.

This assignment requires an understanding of financial concepts such as the cost of capital, financial statements, and market data evaluation.
Transcribed Image Text:**The Collins Group: Estimating Weighted Average Cost of Capital** The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm's weighted average cost of capital. Below is the balance sheet and other relevant information. **Balance Sheet** - **Assets** - Current assets: $38,000,000 - Net plant, property, and equipment: $101,000,000 - Total assets: $139,000,000 - **Liabilities and Equity** - Accounts payable: $10,000,000 - Accruals: $9,000,000 - Current liabilities: $19,000,000 - Long-term debt (40,000 bonds, $1,000 par value): $40,000,000 - Total liabilities: $59,000,000 - Common stock (10,000,000 shares): $30,000,000 - Retained earnings: $50,000,000 - Total shareholders' equity: $80,000,000 - Total liabilities and shareholders' equity: $139,000,000 **Additional Information** - The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. - The beta is 1.25. - The yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. - The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. - The firm's tax rate is 40%. **Assignment** Answer each of the Questions in the two and a half hours permitted. This assignment requires an understanding of financial concepts such as the cost of capital, financial statements, and market data evaluation.
**Understanding the Cost of Preferred Stock**

A company's perpetual preferred stock currently sells for $92.50 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the issue price. What is the firm's cost of preferred stock?

**Options:**

- ○ 8.22%
- ○ 8.65%
- ○ 9.01%
- ○ 9.10%
- ○ 9.56%

In this scenario, determining the firm's cost of preferred stock involves understanding both the dividend yield and the impact of flotation costs associated with issuing new shares.
Transcribed Image Text:**Understanding the Cost of Preferred Stock** A company's perpetual preferred stock currently sells for $92.50 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the issue price. What is the firm's cost of preferred stock? **Options:** - ○ 8.22% - ○ 8.65% - ○ 9.01% - ○ 9.10% - ○ 9.56% In this scenario, determining the firm's cost of preferred stock involves understanding both the dividend yield and the impact of flotation costs associated with issuing new shares.
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