The treasurer of Riley Coal Company is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 3 percent less than that for preferred stock. Debt can be issued at a yield of 11.6 percent, and the corporate tax rate is 40 percent. Preferred stock will be priced at $76 and pay a dividend of $7.00. The flotation cost on the preferred stock is $8. a. Compute the aftertax cost of debt. Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Aftertax cost of debt % b. Compute the aftertax cost of preferred stock. Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Aftertax cost of preferred stock %
The treasurer of Riley Coal Company is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 3 percent less than that for preferred stock. Debt can be issued at a yield of 11.6 percent, and the corporate tax rate is 40 percent. Preferred stock will be priced at $76 and pay a dividend of $7.00. The flotation cost on the preferred stock is $8. a. Compute the aftertax cost of debt. Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Aftertax cost of debt % b. Compute the aftertax cost of preferred stock. Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Aftertax cost of preferred stock %
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 treasurer of Riley Coal Company is asked to compute the cost of fixed income securities for her corporation. Even before making
the calculations, she assumes the aftertax cost of debt is at least 3 percent less than that for preferred stock.
Debt can be issued at a yield of 11.6 percent, and the corporate tax rate is 40 percent. Preferred stock will be priced at $76 and pay a
dividend of $7.00. The flotation cost on the preferred stock is $8.
a. Compute the aftertax cost of debt.
Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.
Aftertax cost of debt
%
b. Compute the aftertax cost of preferred stock.
Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.
Aftertax cost of preferred stock
%
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