Fin 500 Module 8 - A company issues 15-year, $1,000 par-value bonds,with a coupon rate of 5%. The bonds are sold for $619.70.

Fin 500 Module 8

Notes: This assignment is to be done individually.Show all calculations necessary and word-process your assignment. If afinancial calculator is used, define all inputs in addition to the output.

Problem 1

A company issues 15-year, $1,000 par-value bonds,with a coupon rate of 5%. The bonds are sold for $619.70. The tax rate is 30%.Compute the cost of debt before taxes and after taxes.

Problem 2

Suppose a company issues common stock to the public for $25 a share. The expected dividend is $2.50 per share and the growth in dividends is 8%. If the flotation cost is 10% of the issue proceeds, compute the cost of external equity, re.

Calculate the cost of preferred stock (rPS) with the given information:

Par Value = $200

Current Price = $208

Flotation Cost = $16

Annual Dividend = 12% of Par

Problem 4

A company is investigating the effect on its cost of capital with respect to the tax rate. Suppose there is a capital structure of 20% debt, 10% preferred stock, and 70% common stock. The cost of financing with retained earnings is re = 12%, the cost of preferred stock financing isr PS = 7%, and the before-tax cost of debt is rd = 9%. Calculate the weighted average cost of capital (WACC) given a tax rate of 35%.

File name: Fin-500-Module-8.xls
File type: application/vnd.ms-excel

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