What is the cost of common stock for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket. The optimal capital structure is listed below: Source of Capital Weight Long-Term Debt 25% Preferred Stock 20% Common Stock 55% Debt: The firm can issue $1,000 par value, 8% coupon interest bonds with a 20-year maturity date. The bond has an average discount of $30 and flotation costs of $30 per bond. The selling price is $1,000. Preferred Stock: The firm can sell preferred stock with a dividend that is 8% of the current price. The stock costs $95. The cost of issuing and selling the stock is expected to be $5 per share. Common Stock: The firm’s common stock is currently selling for $90 per share. The firm expects to pay cash dividends of $7 per share next year. The dividends have been growing at 6%. The stock must be discounted by $7, and flotation costs are expected to amount to $5 per share. Retained Earnings: The firm expects to have enough retained earnings in the coming year to be used in place of any new stock being issued

What is the cost of common stock for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket. The optimal capital structure is listed below: Source of Capital Weight Long-Term Debt 25% Preferred Stock 20% Common Stock 55% Debt: The firm can issue $1,000 par value, 8% coupon interest bonds with a 20-year maturity date. The bond has an average discount of $30 and flotation costs of $30 per bond. The selling price is $1,000. Preferred Stock: The firm can sell preferred stock with a dividend that is 8% of the current price. The stock costs $95. The cost of issuing and selling the stock is expected to be $5 per share. Common Stock: The firm’s common stock is currently selling for $90 per share. The firm expects to pay cash dividends of $7 per share next year. The dividends have been growing at 6%. The stock must be discounted by $7, and flotation costs are expected to amount to $5 per share. Retained Earnings: The firm expects to have enough retained earnings in the coming year to be used in place of any new stock being issued

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter17: Multinational Capital Structure And Cost Of Capital

Section: Chapter Questions

Problem 14QA

See similar textbooks

Related questions

Q: Arcadia health has $10 million invested in long term corporate bonds. This bond portfolio’s expected…

A: Given: Amount invested = $10 million Portfolio Expected annual return = 9% Portfolio Standard…

Q: You have a 25-year maturity, 10% coupon, 10% yield bond with a duration of 10 years and a convexity…

A: Hello. Since your question has multiple parts, we will solve first question for you. If you want…

Q: The Loughran Corporation has issued zero-coupon corporate bonds with a five-year maturity. Investors…

A: Expected maturity value = [100*(1-default rate)] + [100 * default rate*Percentage receivable on…

Q: MeCue Inc.'s bonds currently sell for $1,045. They pay an $80 annual coupon, have a 10-year…

A: A bond is a kind of debt security issued by the government and private companies to the public for…

Q: The risk-free rate on long-term Treasury bonds is 6.04%. Assume thatthe market risk premium is 5%.…

A: Risk-free rate: The risk-free rate is the rate of return the investor would expect from the…

Q: Taussig Corp.'s bonds currently sell for P1,150. They have a 6.75% annual coupon rate and a 15-year…

A: Yield to call (YTC) is a typical financial term that tells us the return a bondholder receives if…

Q: The yield on a corporate bond is 10%, and it is currently selling at par. The marginal tax rate is…

A: The security which offers a higher after tax return should be considered as a better investment…

Q: Indell stock has a current market value of $130 million and a beta of 1.50. Indell currently The…

A: Systematic risk is the type of risk that is caused by factors that are beyond a company's control…

Q: The total market value of the equity of Okefenokee Condos is $12 million, and the total value of its…

A: Formulas used are: Required rate of return = Risk-free rate + Beta * (Market risk premium) WACC =…

Q: (a) Without doing any computation, its market value should be greater or less than the face value?…

A: When annual coupon rate is greater than the YTM (yield to maturity) the bond will be trading at a…

Q: I would like to know how to work this problem in excel please. ..A semi - annual bond has a face…

A: Bonds are debt instruments issued by companies. The issuing company pays periodic interest or…

Q: Assume a 1,000 face value bond with 20 years left until maturity. If the coupon rate is 10%, paid…

A: Using financial calcularor, FV = 1000 N = 20 *2 =40 PMT = 1000*10%/2 =50

Q: I need help on this pls and as soon as possible: C. A coupon bond has a face value of $ 1,000,…

A: If the coupon rate of the bond is more than the yield of the bond then the price of the bond will be…

Q: LUVFINANCE, Inc. is estimating its WACC. It is operating at its optimal capital structure. Its…

A: WACC means weighted avg. of the cost of different sources. It simply can be computed as sum of…

Q: The yield to maturity (YTM) on 1-year zero-coupon bonds is 5%, and the YTM on 2-year zeros is 6%.…

A: a. The calculation of the price of a 2-year maturity coupon bond is as follows: Hence, the current…

Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

What is the cost of common stock for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket. The optimal capital structure is listed below:

Source of Capital	Weight
Long-Term Debt	25%
Preferred Stock	20%
Common Stock	55%

Debt:	The firm can issue $1,000 par value, 8% coupon interest bonds with a 20-year maturity date. The bond has an average discount of $30 and flotation costs of $30 per bond. The selling price is $1,000.
Preferred Stock:	The firm can sell preferred stock with a dividend that is 8% of the current price. The stock costs $95. The cost of issuing and selling the stock is expected to be $5 per share.
Common Stock:	The firm’s common stock is currently selling for $90 per share. The firm expects to pay cash dividends of $7 per share next year. The dividends have been growing at 6%. The stock must be discounted by $7, and flotation costs are expected to amount to $5 per share.
Retained Earnings:	The firm expects to have enough retained earnings in the coming year to be used in place of any new stock being issued.

Definition Definition Type of stock which is granted priority over dividend distributions as compared to common stockholders. Preferred stocks also do not carry any voting rights. Notably, in a case where a company is going to be liquidated, preferred stockholders have a priority claim on the value of assets of the company as quoted in the balance sheet, as compared to the common stockholders.

Expert Solution

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!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

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.

Similar questions

Km for the following Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this compute the cost of capital for the a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11.4 percent mat is paud semiannually. The bond is currently selling for a price of $1,121 and will mature in 10 years The firm's tax rate is 34 percent b. If the firm's bonds are not frequently traded, how would you go about determining a cost of debt for this company? A new common stock issue that paid a $174 dividend last year. The par value of the stock is $15, and the firm's dividends per share have grown at a rate of 81 percent per year. This growth rate is expected to continue into the foreseeable tuture The pnce of this stock is now $27 12 d. A preferred stock paying a 10.7 percent dividend on a $126 par value The preferred shares are currently selling for…
Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the pretax cost of debt from Question 7, what is the cost of equity, RS?
Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and as a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the answers from Questions 7 and 8, what is the firm’s WACC?
In order to calculate a WACC, you first must know the firm's cost of debt and equity. For debt, a firm can issue new bonds with a 4.05% coupon rate and a maturity of 25 years. Interest is paid semi-annually. The market price of the new issue would be $1,146.01 less a 4% of par flotation cost. The face value of the bond, payable at maturity, is $1,000. What is the before-tax cost of debt for this firm (please respond with to the basis point, but without the % sign - meaning if you calculate 3.7569456%, then enter 3.76.)?
What are the excel formulas and answers to Part A and Part B. Part A: (Left Side) KIMCHI CORPORATION's capital investment bonds have a maturity of 10 years with a face value of $1,000 and a semi-annual 10% coupon. They are callable in 3 years at $1150 and currently sell for $1,290. What is the nominal yield to maturity and the nominal yield to call? What return should investors expect to earn on these bonds. Part B: (Right Side) KIMCHI CORPORATION also has bonds with 5 years left to maturity with an annual coupon of 10%. What would be the yield to maturity at a current market price of $850? What would be the yield to maturity if the current market price would be $1,125? What would be the price of the bond to you if your cost of capital was 12%? What would be the price of the bond to you if your cost of capital was 8%?
Coleman’s common stock is currently selling at $50 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Coleman’s beta is 1.2, the yield on T-bonds is 7%, and the market risk premium is estimated to be 6%. For the own-bondyield-plus-risk-premium approach, the firm uses a 4% judgmental risk premium. Assume for now that Coleman Corp. does not plan to issue new shares of common stock. Find Coleman’s estimate cost of equity using: (a) the CAPM approach; (b) the dividend growth approach; and (c) the own-bond-yield-plus-judgmental-risk-premium method. What is your final estimate for the cost of equity, rs?
IN EXCEL! Assume you would like to estimate ABC Company's debt cost. ABC's bond has a semi-annual 5.25 % coupon rate and a Par value of $1,000, with a market price of 86 percent of the Par. Assume a number of years to maturity of 12 years. Estimate the cost of debt for ABC Company. Assume the same number of years to maturity of Question 1. You buy a zero-coupon to reach your goal of having $1,000,000.00 when the zero-Coupon bond matures. The yield of this Zero-Coupon bond is 6.25% compounded semiannually, how much must you invest today to achieve your goal? The face value of each zero-coupon bond is $10,000. IN EXCEL
Give typing answer with explanation and conclusion to all parts
What is the average return in the market (Rm)?
You are analyzing the after-tax cost of debt for a firm. You know that the firm’s 12-year maturity, 7.50 percent semiannual coupon bonds are selling at a price of $1,000.00. These bonds are the only debt outstanding for the firm - What is the current YTM of the bonds?
Doha plc has some surplus funds that it wishes to invest in bonds. The company requires a return of 15% on bonds, and the finance director has asked you to analyse whether it should invest in either of the following bonds that are available:Company A: Expected profit 12% bonds, redeemable at par at the end of two more years, with a current market value of QAR 95 per QAR 100 bondCompany B: Expected profit 8% bonds, redeemable at QAR110 at the end of two more years, with a current market value of QAR 95 per QAR 100 bonda. Calculate the expected value (price) of the two bonds and evaluate if either offer an appropriate return for Doha Plc.b. Critically evaluate what would be the impact on the price of bonds if Doha Plc reduces their required return.c. Critically evaluate and discuss the factors that should be considered by the directors of a company when choosing whether to use debt or equity finance for a new projectd. Recently one director has attended a finance conference, on their…
LUVFINANCE, Inc. is estimating its WACC. It is operating at its optimal capital structure. Its outstanding bonds have a 12 percent coupon, paid semiannually, a current maturity of 17 years, and sell for $1,162. It has 100,000 bonds outstanding. The firm can issue new 20-year maturity semiannual bonds at par but will incur flotation costs of $50 per bond (Hint: the coupon rate on the new bonds = the YTM on existing bonds). The firm could sell, at par, $100 preferred stock that pays a 12 percent annual dividend that is currently selling for $120. The firm currently has 1,000,000 shares of preferred stock outstanding. Rollins' beta is 1.34, the risk-free rate is 1.77 percent, and the market risk premium is 6 percent. The common stock currently sells for $100 a share and there are 5,000,000 shares outstanding. The firm's marginal tax rate is 40 percent. What is the WACC?