1. A firm raises capital by selling $10,000 worth of dept with flotation costs equal to 1% of its par value. If the debt matures in 15 years and has an annual coupon interest rate of 12%, what is the bonds YTM?
2. Gronseth Drywall Systems, inc., is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the firm that different maturities will carry different coupon rates and sell at different prices. The firm must choose among sevel alternatives. In each case, the bonds will have a $1000 par value and flotation costs will be $35 per bond. The company is taxed at 35% Use the approximation formula to calculate the after-tax cost of financing with the following alternative. (See information below)
Coupon Rate: 8%
Time to Maturity: 11 Years
Premium or Discount: $260
3. Edna Recording Studios, Inc., reported earnings available to common stock of $4,800,000 last year. From those earnings, the company paid a dividend of $1.22 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 35% debt, 15% preferred stock, and 50% common stock. It is taxed at a rate of 35%.
a. If the market price of the common stock is $37 and dividends are expected to grow at a rate of 7% per year for the foreseeable future, what is the company's cost of retained earnings financing ?
b. If underpricing and flotation costs on new shares of common stock amount to $7 per share, what is the company's cost of new common stock financing ?
c. The company can issue $1.81 dividend preferred stock for a market price of $30 per share. Flotation costs would amount to $2 per share. What is the cost of preferred stock financing ?
d. The company can issue $1,000-par-value,12% coupon, 9-year bonds that can be sold for $1,150 each. Flotation costs would amount to $20 per bond. Use the estimation formula to figure the approximate after-tax cost of debt financing?
e. What is the WACC.