The Crane Products Co. currently has debt with a market value of $250 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) that have a maturity of 15 years and are currently priced at $1,141.55 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $24 per share. The preferred shares pay an annual dividend of $1.20. Crane also has 14 million shares of common stock outstanding with a price of $20.00 per share. The firm is expected to pay a $2.20 common dividend one year from today, and that dividend is expected to increase by 4 percent per year forever. If Crane is subject to a 28 percent marginal tax rate. Calculate the appropriate cost of capital for a new project that is financed with the same proportion of debt, preferred shares, and common shares as the firm's current capital structure. Assume that the project has the same degree of systematic risk as the average project that the firm is currently undertaking. Also assume that the project is in the same general industry as the firm's current line of business. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.) Appropriate cost of capital %
The Crane Products Co. currently has debt with a market value of $250 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) that have a maturity of 15 years and are currently priced at $1,141.55 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $24 per share. The preferred shares pay an annual dividend of $1.20. Crane also has 14 million shares of common stock outstanding with a price of $20.00 per share. The firm is expected to pay a $2.20 common dividend one year from today, and that dividend is expected to increase by 4 percent per year forever. If Crane is subject to a 28 percent marginal tax rate. Calculate the appropriate cost of capital for a new project that is financed with the same proportion of debt, preferred shares, and common shares as the firm's current capital structure. Assume that the project has the same degree of systematic risk as the average project that the firm is currently undertaking. Also assume that the project is in the same general industry as the firm's current line of business. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.) Appropriate cost of capital %
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:The Crane Products Co. currently has debt with a market value of $250 million outstanding. The debt consists of 9 percent coupon
bonds (semiannual coupon payments) that have a maturity of 15 years and are currently priced at $1,141.55 per bond. The firm also
has an issue of 2 million preferred shares outstanding with a market price of $24 per share. The preferred shares pay an annual
dividend of $1.20. Crane also has 14 million shares of common stock outstanding with a price of $20.00 per share. The firm is expected
to pay a $2.20 common dividend one year from today, and that dividend is expected to increase by 4 percent per year forever. If Crane
is subject to a 28 percent marginal tax rate. Calculate the appropriate cost of capital for a new project that is financed with the same
proportion of debt, preferred shares, and common shares as the firm's current capital structure. Assume that the project has the same
degree of systematic risk as the average project that the firm is currently undertaking. Also assume that the project is in the same
general industry as the firm's current line of business. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to
2 decimal places, e.g. 15.25%.)
Appropriate cost of capital
%
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