Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 17, Problem 21P
The treasurer of Kelly Bottling Company (a corporation) currently has
a. Compute the amount of the aftertax income from the additional preferred stock if it is purchased.
b. Compute the aftertax borrowing cost to purchase the additional preferred stock. That is, multiply the interest cost times
c. Should the treasurer proceed with his proposal?
d. If interest rates and dividend yields in the market go up six months after a decision to purchase is made, what impact will this have on the outcome?
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The treasurer of Kelly Bottling Company (a corporation) currently has $100,000 invested in preferred stock yielding 8 percent. He appreciates the tax advantages of preferred stock and is considering buying $100,000 more with borrowed funds. The cost of the borrowed funds is 10 percent. He suggests this proposal to his board of directors. They are somewhat concerned by the fact that the treasurer will be paying 2 percent more for funds than the company will be earning on the investment. Kelly Bottling is in a 34 percent tax bracket, with dividends taxed at 15 percent.a. Compute the amount of the aftertax income from the additional preferred stock if it is purchased. (Do not round intermediate calculations and round your answer to the nearest whole dollar.)
The treasurer of Kelly Bottling Company (a corporation) currently has $250,000 invested in preferred stock yielding 9 percent. He
appreciates the tax advantages of preferred stock and is considering buying $250,000 more with borrowed funds. The cost of the
borrowed funds is 11 percent. He suggests this proposal to his board of directors. They are somewhat concerned by the fact that the
treasurer will be paying 2 percent more for funds than the company will be earning on the investment. Kelly Bottling is in a 35 percent
tax bracket, with dividends taxed at 10 percent.
a. Compute the amount of the aftertax income from the additional preferred stock if it is purchased. (Do not round intermediate
calculations and round your answer to the nearest whole dollar.)
Aftertax income
b. Compute the aftertax borrowing cost to purchase the additional preferred stock. (Do not round intermediate calculations and
round your answer to the nearest whole dollar.)
Aftertax borrowing cost
The treasurer of Kelly Bottling Company (a corporation) currently has $120,000 invested in preferred stock yielding 6 percent. He appreciates the tax advantages of preferred stock and is considering buying $120,000 more with borrowed funds. The costs of the borrowed funds is 11 percent. He suggests this proposal to his board of directors. They are somewhat concerned by the fact that the treasurer will be paying 5 percent more for funds than the company will be earning on the investment. Kelly Bottling is in a 35 percent tax bracket, with dividends taxed at 15 percent. Compute the amount of the after-tax income from the additional preferred stock if it is purchased. Compute the after-tax borrowing cost to purchase the additional preferred stock.
Chapter 17 Solutions
Foundations of Financial Management
Ch. 17 - Prob. 1DQCh. 17 - Prob. 2DQCh. 17 - Prob. 3DQCh. 17 - Prob. 4DQCh. 17 - Prob. 5DQCh. 17 - Prob. 6DQCh. 17 - Prob. 7DQCh. 17 - Prob. 8DQCh. 17 - Prob. 9DQCh. 17 - Why is the cumulative feature of preferred stock...
Ch. 17 - A small amount of preferred stock is...Ch. 17 - Prob. 12DQCh. 17 - Prob. 13DQCh. 17 - Prob. 1PCh. 17 - Time Watch Co. has 46 million in earnings and is...Ch. 17 - Prob. 3PCh. 17 - Prob. 4PCh. 17 - Prob. 5PCh. 17 - Prob. 6PCh. 17 - Prob. 7PCh. 17 - Prob. 8PCh. 17 - Prob. 9PCh. 17 - Prob. 10PCh. 17 - Prob. 11PCh. 17 - Boles Bottling Co. has issued rights to its...Ch. 17 - Prob. 13PCh. 17 - Prob. 14PCh. 17 - Prob. 15PCh. 17 - Prob. 16PCh. 17 - Prob. 17PCh. 17 - Prob. 18PCh. 17 - Prob. 19PCh. 17 - Prob. 20PCh. 17 - The treasurer of Kelly Bottling Company (a...Ch. 17 - Prob. 22PCh. 17 - Prob. 2WE
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