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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Transcribed Image Text:**Transcription of Financial Problem Set**
**Context**: This is a set of problems designed to help students understand concepts related to the cost of capital, bonds, and equity financing.
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a. A bond that has $1,000 par value (face value) and a contract or coupon interest rate of 9 percent. A new issue would have a floatation cost of 9 percent of the $1,125 market value. The bonds mature in 5 years. The firm's average tax rate is 30 percent and its marginal tax rate is 25 percent.
b. A new common stock issue that paid a $1.20 dividend last year. The par value of the stock is $15, and earnings per share have grown at a rate of 9 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend-earnings ratio of 30 percent. The price of this stock is now $29, but 8 percent flotation costs are anticipated.
c. Internal common equity when the current market price of the common stock is $43. The expected dividend this coming year should be $3.00, increasing thereafter at an annual growth rate of 8 percent. The corporation's tax rate is 25 percent.
d. A preferred stock paying a dividend of 9 percent on a $110 par value. If a new issue is offered, flotation costs will be 11 percent of the current price of $166.
e. A bond selling to yield 12 percent after flotation costs, but before adjusting for the marginal corporate tax rate of 25 percent. In other words, 12 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows (principal and interest).
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**Question:**
a. What is the firm’s after-tax cost of debt on the bond?
**Answer Format**:
____ % (Round to two decimal places.)
**Note**: The text does not contain any graphs or diagrams.
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