After-Tax Cost of Debt

Calculate the after-tax cost of debt under each of the following conditions:

a. Interest rate of 13%; tax rate of 0%. Round your answer to two decimal places.  %

b. Interest rate of 13%; tax rate of 25%. Round your answer to two decimal places.  %

c. Interest rate of 13%; tax rate of 30%. Round your answer to two decimal places.  %

After-Tax Cost of Debt

LL Incorporated’s currently outstanding 9% coupon bonds have a yield to maturity of 14%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 30%, what is LL’s after-tax cost of debt? Round your answer to two decimal places.

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Cost of Preferred Stock

Duggins Veterinary Supplies can issue perpetual preferred stock at a price of $58.00 per share with an annual dividend of $3.50 a share. Ignoring flotation costs, what is the company’s cost of preferred stock, rps? Round your answer to two decimal places.

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Cost of Preferred Stock with Flotation Costs

Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. A similar stock is selling on the market for $66. Burnwood must pay flotation costs of 7% of the issue price. What is the cost of the preferred stock? Round your answer to two decimal places.

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Cost of Equity: DCF

Summerdahl Resorts’ common stock is currently trading at $38.00 per share. The stock is expected to pay a dividend of $2.25 a share at the end of the year (D1 = $2.25), and the dividend is expected to grow at a constant rate of 4% a year. What is its cost of common equity? Round your answer to two decimal places.

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Cost of Equity: CAPM

Booher Book Stores has a beta of 1.0. The yield on a 3-month T-bill is 4% and the yield on a 10-year T-bond is 6%. The market risk premium is 6%, and the return on an average stock in the market last year was 15%. What is the estimated cost of common equity using the CAPM? Round your answer to two decimal places.

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WACC

Shi Importers’ balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi’s tax rate is 35%, rd = 6%, rps = 8.2%, and rs = 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC? Round your answer to two decimal places.

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Bond Yield and After-Tax Cost of Debt

A company’s 7% coupon rate, semiannual payment, $1,000 par value bond that matures in 25 years sells at a price of $671.06. The company’s federal-plus-state tax rate is 35%. What is the firm’s after-tax component cost of debt for purposes of calculating the WACC? Round your answer to two decimal places. (Hint: Base your answer on the nominal rate.)

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Cost of Equity

The earnings, dividends, and common stock price of Shelby Inc. are expected to grow at 4% per year in the future. Shelby’s common stock sells for $21.50 per share, its last dividend was $2.00, and the company will pay a dividend of $2.08 at the end of the current year.

a. Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places.  %

b. If the firm’s beta is 1.7, the risk-free rate is 5%, and the expected return on the market is 14%, then what would be the firm’s cost of equity based on the CAPM approach? Round your answer to two decimal places.  %

c. If the firm’s bonds earn a return of 8%, and analysts estimate the market risk premium is 3 to 5 percent, then what would be your estimate of rs using the over-own-bond-yield-plus-judgmental-risk-premium approach? Round your answer to two decimal places. (Hint: Use the midpoint of the risk premium range).  %

d. On the basis of the results of parts a through c, what would be your estimate of Shelby’s cost of equity? Assume Shelby values each approach equally. Round your answer to two decimal places.  %

Cost of Equity

Radon Homes’s current EPS is $7.01. It was $3.72 5 years ago. The company pays out 40% of its earnings as dividends, and the stock sells for $33.

a. Calculate the historical growth rate in earnings. Round your answer to two decimal places. (Hint: This is a 5-year growth period.)      %

b. Calculate the next expected dividend per share, D1 Assume that the past growth rate will continue. Round your answer to the nearest cent. (Hint: D0 = 0.40($7.01) = $2.80). $   

c. What is Radon’s cost of equity, rs? Round your answer to two decimal places.      %

The Cost of Equity and Flotation Costs

Messman Manufacturing will issue common stock to the public for $30. The expected dividend and growth in dividends are $2.75 per share and 5%, respectively. If the flotation cost is 8% of the issue’s gross proceeds, what is the cost of external equity, re? Round your answer to two decimal places.  %

The Cost of Equity and Flotation Costs

Suppose a company will issue new 25-year debt with a par value of $1,000 and a coupon rate of 10%, paid annually. The tax rate is 35%. If the flotation cost is 5% of the issue proceeds, then what is the after-tax cost of debt? Disregard the tax shield from the amortization of flotation costs. Round your answer to two decimal places.  %

Market Value Capital Structure

Suppose the Schoof Company has this book value balance sheet:

Current assets		$30,000,000		Current liabilities		$10,000,000
				Notes payable		10,000,000
Fixed assets		50,000,000		Long-term debt		20,000,000
				Common stock
				(1 million shares)		1,000,000
				Retained earnings		39,000,000
Total assets		$80,000,000		Total claims		$80,000,000

The current liabilities consist entirely of notes payable to banks, and the interest rate on this debt is 10%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the company’s permanent capital structure. The long-term debt consists of 30,000 bonds, each with a par value of $1,000, an annual coupon interest rate of 6%, and a 25-year maturity. The going rate of interest on new long-term debt, rd, is 11%, and this is the present yield to maturity on the bonds. The common stock sells at a price of $56 per share. Calculate the firm’s market value capital structure. Round your answers to two decimal places.

Short-term debt		$		%
Long-term debt		$		%
Common equity		$		%
Total capital		$		%