1. (Cost of equity) Sake Corporation is issuing new common stock at a market price of $31. Dividends last year were $1.65 and are expected to grow at an annual rate of 11 percent forever. Flotation costs will be 9 percent of market price. What is Salte's cost of equity?
Sake's cost of external common equity is E1%. (Round to two decimal places.)
2. (Cost of debt) The Zephyr Corporation is contemplating a new investment to be financed 33 percent from debt. The firm could sell new $1,000 par value bonds at a net price of $920. The coupon interest rate is 8 percent, and the bonds would mature in 16 years. If the company is in a 35 percent tax bracket, what is the after-tax cost of capital to Zephyr for bonds?
The after-tax cost of capital to Zephyr for bonds is111%. (Round to two decimal places.)
3. (Cost of preferred stock) Your firm is planning to issue preferred stock. The stock sells for $114; however, if new stock is issued, the company would receive only $101.46. The par value of the stock is $100, and the dividend rate is 15 percent. What is the cost of capital for the stock to your firm?
The cost of capital for the preferred stock to your firm is 0%. (Round to two decimal places.)
4. (Cost of equity) The common stock for the Bestsold Corporation sells for $58. If a new issue is sold, the flotation costs are estimated to be 9 percent. The company pays 60 percent of its earnings in dividends, and a $3.60 dividend was recently paid. Earnings per share 4 years ago were $4.00. Earnings are expected to continue to grow at the same annual rate in the future as during the past 4 years. The firm's marginal tax rate is 33 percent. Calculate the cost of (a) internal common equity and (b) external common equity.
a. What is the firm's cost of internal common equity? El% (Round to two decimal places.)
b. What is the firm's cost of external common equity?
5. (Cost of debt) Sincere Stationery Corporation needs to raise $800,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 17 percent and a maturity of 13 years. The investors require a rate of return of 9 percent.
a. Compute the market value of the bonds.
b. What will the net price be if flotation costs are 11 percent of the market price?
c. How many bonds will the firm have to issue to receive the needed funds?
d. What is the firm's after-tax cost of debt if its average tax rate is 25 percent and its marginal tax rate is 33 percent?
6. (Weighted average cost of capital) The capital structure for the Carion Corporation is provided here. The company plans to maintain its debt structure in the future. If the firm has an after-tax cost of debt of 7.8 percent, a cost of preferred stock of 12.1 percent, and a cost of common stock of 19.6 percent, what is the firm's weighted average cost of capital?
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CAPITAL STRUCTURE ($000)
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?
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Bonds
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$1,099
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Preferred stock
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257
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Common stock
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3,501
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$4,857
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The firm's weighted average cost of capital is 11%. (Round to two decimal places.)