(a) Samson told you that the company's pre-tax cost of debt is 5.7%, calculated by annual coupon payment of $57 per bond dividend by the face value of $1,000. Do you agree with his estimation? Briefly explain. (b) Calculate the cost of equity and after-tax cost of debt of Fun-land Corporation respectively. [in % with 2 decimal places.] (c) Calculate the company's WACC. [in % with 2 decimal places.]
(a) Samson told you that the company's pre-tax cost of debt is 5.7%, calculated by annual coupon payment of $57 per bond dividend by the face value of $1,000. Do you agree with his estimation? Briefly explain. (b) Calculate the cost of equity and after-tax cost of debt of Fun-land Corporation respectively. [in % with 2 decimal places.] (c) Calculate the company's WACC. [in % with 2 decimal places.]
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
Problem 1PS
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Question
![You are hired to replace Samson as Finance Manager at Fun-land Corporation. You are given the
following information concerning Fun-land Corporation:
Debt: 12,000 bonds outstanding that pay $28.5 semi-annual coupon payments, with 15 years to
maturity. The bond currently sells for 95 percent of its face value of $1,000. The corporate tax
rate is 28%.
Common stock: 235,000 shares of common stock currently selling for $56.5 per share. The stock
will pay dividend of $3.5 next year. The dividend is expected to grow by 4 percent per year
indefinitely.
REQUIRED
(a) Samson told you that the company's pre-tax cost of debt is 5.7%, calculated by annual coupon
payment of $57 per bond dividend by the face value of $1,000. Do you agree with his
estimation? Briefly explain.
(b) Calculate the cost of equity and after-tax cost of debt of Fun-land Corporation respectively.
[in % with 2 decimal places.]
(c) Calculate the company's WACC. [in % with 2 decimal places.]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F06b364de-e722-42e1-ae6d-7b2d3872db50%2F3ae7f9a7-d087-4679-b90b-9f95ea085ceb%2Fyc8jyaf_processed.png&w=3840&q=75)
Transcribed Image Text:You are hired to replace Samson as Finance Manager at Fun-land Corporation. You are given the
following information concerning Fun-land Corporation:
Debt: 12,000 bonds outstanding that pay $28.5 semi-annual coupon payments, with 15 years to
maturity. The bond currently sells for 95 percent of its face value of $1,000. The corporate tax
rate is 28%.
Common stock: 235,000 shares of common stock currently selling for $56.5 per share. The stock
will pay dividend of $3.5 next year. The dividend is expected to grow by 4 percent per year
indefinitely.
REQUIRED
(a) Samson told you that the company's pre-tax cost of debt is 5.7%, calculated by annual coupon
payment of $57 per bond dividend by the face value of $1,000. Do you agree with his
estimation? Briefly explain.
(b) Calculate the cost of equity and after-tax cost of debt of Fun-land Corporation respectively.
[in % with 2 decimal places.]
(c) Calculate the company's WACC. [in % with 2 decimal places.]
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