Chapter 11, Problem 15P

Summary Introduction

To calculate: The cost of fixed income securities for Riley Coal Inc., and determine whether the treasurer is correct as per the assumptions.

Introduction:

Cost of preferred stock (Kp):

It refers to the dividend amount annually paid by the company on its preferred stock. Such dividend is not tax deductible and can be calculated by dividing the annual preferred dividend with the current market price of the preferred stock.

Cost of debt (Kd):

It refers to the effective interest rate paid by the company on its debt, such as bonds and loans. Such interest payments are tax deductible.