1. The treasurer of Riley Coal Co. 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 4 percent less than that for preferred stock. Debt can be issued at a yield of 12.0 percent, and the corporate tax rate is 25 percent. Preferred stock will be priced at $62 and pay a dividend of $7.40. The flotation cost on the preferred stock is $7. a. Compute the aftertax cost of debt. (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. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Aftertax cost of preferred stock: %
c. Based on the facts given above, is the treasurer correct?
No, the treasurer is incorrect.
Yes, the treasurer is correct.
2. Murray Motor Company wants you to calculate its cost of common stock. During the next 12 months, the company expects to pay dividends (D1) of $2.00 per share, and the current price of its common stock is $40 per share. The expected growth rate is 3 percent.
a. Compute the cost of retained earnings (Ke). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Cost of retained earnings: %
b. If a $3 flotation cost is involved, compute the cost of new common stock (Kn). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Cost of new common stock: %