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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.)

Essentials Of Investments
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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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.)
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.)
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