Calculate the after-tax cost of preferred stock for Bozeman-Western Airlines, Inc., which is planning to sell $10 million of $8.50 cumulative preferred stock to the public at a price of $50 a share. Issuance costs are estimated to be $4 a share. The company has a marginal tax rate of 40 percent.
1. Calculate the after-tax cost of preferred stock for Bozeman-Western Airlines, Inc., which is planning to sell $10 million of $8.50 cumulative preferred stock to the public at a price of $50 a share. Issuance costs are estimated to be $4 a share. The company has a marginal tax rate of 40 percent.
2. The Hartley Hotel Corporation is planning a major expansion. Hartley is financed 100% with equity and intends to maintain this capital structure after the expansion. Hartley's beta is 0.90. The expected market return is 16% and the risk-free rate is 10%. If the expansion is expected to produce an
3. Wentworth Industries is 100% equity financed. Its current beta is 0.9. The expected market rate of return is 14% and the risk-free rate is 8%.
a. Calculate Wentworth's cost of equity.
b. If Wentworth changes its capital structure to 30% debt, it estimates that its beta will increase to 1.1. The after-tax cost of debt will be 7%.
Should Wentworth make the capital structure change?
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