Please show work The stock of Matrix Computing sells for $65, and last year’s dividend was $2.53. Security analysts are projecting that the common dividend will grow at a rate of 9% a year. A flotation cost of 12% would be required to issue new common stock. Matrix’s preferred stock sells for $42.00, pays a dividend of $3.32 per share, and new preferred stock could be sold with a flotation cost of 10%. The firm has outstanding bonds with 25 years to maturity, a 15% annual coupon rate, semiannual payments, $1,000 par value. The bonds are trading at $1,271.59. The tax rate is 20%. The market risk premium is 5.5%, the risk-free rate is 7.0%, and Matrix’s beta is 1.2. In its cost-of-capital calculations, Matrix uses a target capital structure with 40% debt, 10% preferred stock, and 50% common equity. a. Calculate the cost of each capital component—in other words, the after-tax cost of debt, the cost of preferred stock (including flotation costs), and the cost of equity (ignoring flotation costs). Use both the CAPM method and the dividend growth approach to find the cost of equity.
Please show work The stock of Matrix Computing sells for $65, and last year’s dividend was $2.53. Security analysts are projecting that the common dividend will grow at a rate of 9% a year. A flotation cost of 12% would be required to issue new common stock. Matrix’s preferred stock sells for $42.00, pays a dividend of $3.32 per share, and new preferred stock could be sold with a flotation cost of 10%. The firm has outstanding bonds with 25 years to maturity, a 15% annual coupon rate, semiannual payments, $1,000 par value. The bonds are trading at $1,271.59. The tax rate is 20%. The market risk premium is 5.5%, the risk-free rate is 7.0%, and Matrix’s beta is 1.2. In its cost-of-capital calculations, Matrix uses a target capital structure with 40% debt, 10% preferred stock, and 50% common equity. a. Calculate the cost of each capital component—in other words, the after-tax cost of debt, the cost of preferred stock (including flotation costs), and the cost of equity (ignoring flotation costs). Use both the CAPM method and the dividend growth approach to find the cost of equity.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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The stock of Matrix Computing sells for $65, and last year’s dividend was $2.53. Security analysts are projecting that the common dividend will grow at a rate of 9% a year. A flotation cost of 12% would be required to issue new common stock. Matrix’s preferred stock sells for $42.00, pays a dividend of $3.32 per share, and new preferred stock could be sold with a flotation cost of 10%. The firm has outstanding bonds with 25 years to maturity, a 15% annual coupon rate, semiannual payments, $1,000 par value. The bonds are trading at $1,271.59. The tax rate is 20%. The market risk premium is 5.5%, the risk-free rate is 7.0%, and Matrix’s beta is 1.2. In its cost-of-capital calculations, Matrix uses a target capital structure with 40% debt, 10% preferred stock, and 50% common equity.
a. Calculate the cost of each capital component—in other words, the after-tax cost of debt, the cost of preferred stock (including flotation costs), and the cost of equity (ignoring flotation costs). Use both the CAPM method and the dividend growth approach to find the cost of equity.
| P0 | $65.00 | |
| D0 | $2.53 | |
| g | 9% | |
| Flotation cost for common | 12% | |
| Ppf | $42.00 | |
| Dpf | $3.32 | |
| Flotation cost for preferred | 10% | |
| Bond maturity | 25 | |
| Payments per year | 2 | |
| Annual coupon rate | 15% | |
| Par | $1,000.00 | |
| $1,271.59 | ||
| Tax rate | 20% | |
| Beta | 1.2 | |
| Market risk premium, RPM | 5.5% | |
| Risk free rate, rRF | 7.0% | |
| Target capital structure from debt | 40% | |
| Target capital structure from preferred stock | 10% | |
| Target capital structure from common stock | 50% |
| Cost of debt: | ||||
| N = | 50 | |||
| PMT = | $75.00 | |||
| PV = | -$1,271.59 | |||
| FV = | $1,000.00 | |||
| Semiannual yield = RATE = | ||||
| Annual B-T rd = | ||||
| B-T rd × | (1 – T) | = | A-T rd | |
| 0% | = | |||
| Cost of preferred stock (including flotation costs): | ||||
| Dpf / | Net Ppf | = | rpf | |
| = | ||||
| Cost of common equity, dividend growth approach (ignoring flotation costs): | ||||
| D1 / | P0 + | g = | rs | |
| Cost of common equity, CAPM: | ||||
| rRF + | b × RPM | = | rs | |
| = |
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