1) You are given the information on the company. Total market value is= $38 million. Company’s capital structure, given here, is considered to be optimal.
Market Value
Bonds, $1000 par, 6% coupon, 5% YTM $10,000,000
Preferred Stock, 4%, $100 par, 100,000 shares @ $60 per share $6,000,000
Common Stock, 100,000 shares @ $220 per share $22,000,000
a) Determine the after-tax cost of debt?
b) Suppose a $4 dividend paid annually, determine the required return for preferred shareholders (i.e. component cost of preferred stock)? (Suppose floatation costs = $0.00)
c) Suppose risk-free rate is= 1%, expected return on stock market is= 7%, and company's beta is= 1.0, determine required return for common stockholders (i.e., component cost of common stock)?