d. If the company can issue $1,000-par-value, 12% coupon, 11-year bonds that can be sold for $1,180 each, and flotation costs would amount to $40 per bond, the after-tax cost of debt financing is %. (Round to two decimal places.)
d. If the company can issue $1,000-par-value, 12% coupon, 11-year bonds that can be sold for $1,180 each, and flotation costs would amount to $40 per bond, the after-tax cost of debt financing is %. (Round to two decimal places.)
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 7P
Related questions
Question
What is the answer of d?
![Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,200,000 last year. From those earnings, the company paid a dividend of $1.31 on each
of its 1,000,000 common shares outstanding. The capital structure of the company includes 40% debt, 20% preferred stock, and 40% common stock. It is taxed at a rate of 21%.
a. If the market price of the common stock is $46 and dividends are expected to grow at a rate of 8% per year for the foreseeable future, what is the company's cost of retained earnings
financing?
b. If underpricing and flotation costs on new shares of common stock amount to $9 per share, what is the company's cost of new common stock financing?
c. The company can issue $1.69 dividend preferred stock for a market price of $33 per share. Flotation costs would amount to $4 per share. What is the cost of preferred stock financing?
d. The company can issue $1,000-par-value, 12% annual coupon, 11-year bonds that can be sold for $1,180 each. Flotation costs would amount to $40 per bond. What is the after-tax
cost of debt financing?
e. What is the WACC?
a. If the market price of the common stock is $46 and dividends are expected to grow at a rate of 8% per year for the foreseeable future, the company's cost of retained earnings financing
is 11.08 %. (Round to two decimal places.)
b. If underpricing and flotation costs on new shares of common stock amount to $9 per share, the company's cost of new common stock financing is 11.82 %. (Round to two
decimal places.)
c. If the company can issue $1.69 dividend preferred stock for a market price of $33 per share, and flotation costs would amount to $4 per share, the cost of preferred stock financing is
5.83 %. (Round to two decimal places.)
d. If the company can issue $1,000-par-value, 12% coupon, 11-year bonds that can be sold for $1,180 each, and flotation costs would amount to $40 per bond, the after-tax cost of debt
financing is%. (Round to two decimal places.)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4e9914c0-135a-4395-bc83-3a11be9ef05e%2F77932096-4a8e-4dc9-a2ff-0b7ed71f0685%2F87xe5ug_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,200,000 last year. From those earnings, the company paid a dividend of $1.31 on each
of its 1,000,000 common shares outstanding. The capital structure of the company includes 40% debt, 20% preferred stock, and 40% common stock. It is taxed at a rate of 21%.
a. If the market price of the common stock is $46 and dividends are expected to grow at a rate of 8% per year for the foreseeable future, what is the company's cost of retained earnings
financing?
b. If underpricing and flotation costs on new shares of common stock amount to $9 per share, what is the company's cost of new common stock financing?
c. The company can issue $1.69 dividend preferred stock for a market price of $33 per share. Flotation costs would amount to $4 per share. What is the cost of preferred stock financing?
d. The company can issue $1,000-par-value, 12% annual coupon, 11-year bonds that can be sold for $1,180 each. Flotation costs would amount to $40 per bond. What is the after-tax
cost of debt financing?
e. What is the WACC?
a. If the market price of the common stock is $46 and dividends are expected to grow at a rate of 8% per year for the foreseeable future, the company's cost of retained earnings financing
is 11.08 %. (Round to two decimal places.)
b. If underpricing and flotation costs on new shares of common stock amount to $9 per share, the company's cost of new common stock financing is 11.82 %. (Round to two
decimal places.)
c. If the company can issue $1.69 dividend preferred stock for a market price of $33 per share, and flotation costs would amount to $4 per share, the cost of preferred stock financing is
5.83 %. (Round to two decimal places.)
d. If the company can issue $1,000-par-value, 12% coupon, 11-year bonds that can be sold for $1,180 each, and flotation costs would amount to $40 per bond, the after-tax cost of debt
financing is%. (Round to two decimal places.)
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 2 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
![Financial Accounting](https://www.bartleby.com/isbn_cover_images/9781305088436/9781305088436_smallCoverImage.gif)
Financial Accounting
Accounting
ISBN:
9781305088436
Author:
Carl Warren, Jim Reeve, Jonathan Duchac
Publisher:
Cengage Learning
![Financial Accounting](https://www.bartleby.com/isbn_cover_images/9781337272124/9781337272124_smallCoverImage.gif)
Financial Accounting
Accounting
ISBN:
9781337272124
Author:
Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:
Cengage Learning
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
![Financial Accounting](https://www.bartleby.com/isbn_cover_images/9781305088436/9781305088436_smallCoverImage.gif)
Financial Accounting
Accounting
ISBN:
9781305088436
Author:
Carl Warren, Jim Reeve, Jonathan Duchac
Publisher:
Cengage Learning
![Financial Accounting](https://www.bartleby.com/isbn_cover_images/9781337272124/9781337272124_smallCoverImage.gif)
Financial Accounting
Accounting
ISBN:
9781337272124
Author:
Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:
Cengage Learning