11- 1A.            (Individual or Component Costs of Capital)  Compute the cost for the following sources of Financing:

            a.         A bond that has a $1,000 par value (face value) and a contract or coupon interior rate of 12%.  A new issue would have a flotation cost of 6% of the $1,125 market value.  The bonds mature in 10 years.  The firm’s average tax rate is 30% and its marginal tax rate is 34%.

            b.         A new common stock issue that paid a $1.75 dividend last year.  The par value of the stock is $15, and earnings per share have grown at a rate of 8% per year.  This growth rate is expected to continue into the foreseeable future.  The company maintains a constant dividend/earnings ratio of 30%.  The price of this stock is now $28, but 5% flotation costs are anticipated.

            c.         Internal common equity where the current market price of the common stock is $43.50.  The expected dividend this coming year should be $3.25, increasing thereafter at a 7% annual growth rate.  The corporation’s tax rate is 34%.

            d.         A preferred stock paying a 10% dividend on a $125 par value.  If a new issue is offered, flotation costs will be 12% of the current price of $150.

            e.         A bond selling to yield 13% after flotation costs, but prior to adjusting for the marginal corporate tax rate of 34%.  In other words, 13% is the rate that equates the net proceeds from the bond with the present value of the future cash flows (principal and interest).

11- 2A.            (Individual or Component Costs of Capital) Compute the cost for the following sources of financing:

            a.         A bond selling to yield 9% after flotation costs, but prior to adjusting for the marginal corporate tax rate of 34%.  In other words, 9% is the rate that equates the net proceeds from the bond with the present value of the future flows (principal and interest).

            b.         A new common stock issue that paid a $1.25 dividend last year.  The par value of the stock is $2, and the earnings per share have grown at a rate of 6% per year.  This growth rate is expected to continue into the foreseeable future.  The company maintains a constant dividend/earnings ratio of 40%.  The price of this stock is now $30, but 9% flotation costs are anticipated.

            c.         A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 13%.  A new issue would net the company 90% of the $1,125 market value.  The bonds mature in 20 years, and the firm’s average tax rate is 30% and its marginal tax rate is 34%.

            d.         A preferred stock paying a 7% dividend on a $125 par value.  If a new issue is offered, the company can expect to net $90 per share.

            e.         Internal common equity where the current market price of the common stock is $38.  The expected dividend this coming year should be $4, increasing thereafter at a 5% annual growth rate.  This corporation’s tax rate is 34%.

11- 3A.            (Cost of Equity)  Falon Corporation is issuing new common stock at a market price of $28.  Dividends last year were $1.30 and are expected to grow at an annual rate of 7% forever.  Flotation costs will be 6% of market price.  What is Falon’s cost of equity?

11- 4A.            (Cost of Debt)  Temple is issuing a $1,000 par value bond that pays 8% annual interest and matures in 15 years.  Investors are willing to pay $950 for the bond.  Flotation costs will be 11% of market value.  The company is in a 19% tax bracket.  What will be the firm’s after-tax cost of debt on the bond?

11- 5A.            (Cost of Preferred Stock) The preferred stock of Gator Industries sells for $35 and pays $2.75 in dividends.  The net price of the security after issuance costs is $32.50.  What is the cost of capital for the preferred stock?

11- 6A.            (Cost of Debt)  The Walgren Corporation is contemplating a new investment to be financed 33% from debt.  The firm could sell new $1,000 par value bonds at a net price of $950.  The coupon interest rate is 13%, and the bonds would mature in fifteen years.  If the company is in a 34% tax bracket, what is the after-tax cost of capital to Walgren for bonds?

11- 7A.            (Cost of Preferred Stock)  Your firm is planning to issue preferred stock.  The stock sells for $120; however, if new stock is issued, the company would receive only $97.  The par value of the stock is $100, and the dividend rate is 13%.  What is the cost of capital for the stock to your firm?

11- 8A.            (Cost of Internal Equity)  The common stock for Oxford, Inc. is currently selling for $22.50.  Dividends last year were $.80.  Flotation costs on issuing stock will be 10% of market price.  The dividends and earnings per share are projected to have an annual growth rate of 16%.  What is the cost of internal common equity for Oxford?

11- 9A.            (Cost of Equity)  The common stock for the Hetterbrand Corporation sells for $60.  If a new issue is sold, the flotation cost is estimated to be 9%.  The company pays 50% of its earnings in dividends, and a $4.50 dividend was recently paid.  Earnings per share 5 years ago were $5.  Earnings are expected to continue to grow at the same annual rate in the future as during the past 5 years.  The firm’s marginal tax rate is 35%.  Calculate the cost of (a) internal common and (b) external common stock.

11- 10A.           (Cost of Debt)  Gillian Stationery Corporation needs to raise $600,000 to improve its manufacturing plant.  It has decided to issue a $1,000 par value bond with a 15% annual coupon rate and a 10-year maturity.  If the investors require a 10% rate of return:

a.         Compute the market value of the bonds.

b.         What will the net price be if flotation costs are 11.5% 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% and its marginal tax rate is 34%?

11- 11A.          (Cost of Debt)

a.         Rework problem 11-10A assuming a 10 percent coupon rate.  What effect does changing the coupon rate have on the firm’s after-tax cost of capital?

b.         Why is there a change?

11- 12A.          (Weighted Cost of Capital)  The capital structure for the Bias Corporation is provided below.  The company plans to maintain its debt structure in the future.  If the firm has a 6% after-tax cost of debt, a 13.5% cost of preferred stock, and a 19% cost of common stock, what is the firm’s weighted cost of capital?

Capital Structure ($000)
Bonds $1,100
Preferred stock 250
Common stock 3,700
  $5,050


 
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