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HBM, Inc. has the following capital structure

HBM, Inc. has the following capital structure:

Assets              $400,000                                 Debt                             $140,000
                                                            Preferred stock                             20,000
                                                            Common stock                           240,000
The common stock is currently selling for $15 a share, pays a cash dividend of $0.75 per share, and is growing annually at 6 percent.  The preferred stock pays a $9 cash dividend and currently sells for $91 a share.  The debt pays interest of 8.5 percent annually, and the firm is in the 30 percent marginal tax bracket.

What is the after-tax cost of debt?
What is the cost of preferred stock?
What is the cost of common stock?
What is the firm’s weighted-average cost of capital?


TUTORIAL PREVIEW
a. After-tax cost of debt Kd = 8.5% x (1 - tax rate)


                                    = 8.5 x (1 - .30) = 5.95%


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