Financing Homework

2. (Individual and component costs of capital)

a. A bond that has 1,000 par value (face value) and a contract or coupon interest rate of 10.2 percent. Interest payments are $51.00 and are paid semiannually. The bonds have a current market value of $1,120 and will mature in 10 years. The firm’s marginal tax rate is 34 percent.

b. A new common stock issue that paid a $1.75 dividend last year. The first year’s dividends are expected to continue to grow at a 7.2percent per year, forever. The price of the firm’s common stock is now $27.51.

c. A preferred stock that sells for $142, pays a dividend of 9.1 percent, and has a $100 par value.

d. A bond selling to yield 11.9 percent where the firm’s tax rate is 34 percent.

a. The after-tax cost of debt is what percent? (Round to two decimal places.)

b. The cost of common equity is what percent? (Round to two decimal places.)

c. The cost of preferred stock is what percent? (Round to two decimal places.)

d. The after-tax cost of debt is what percent? (Round to two decimal places.)

3. (Cost of preferred stock)

The preferred stock of Gator industries sells for $35.29 and pays $2.78 per year in dividends. What is the cost of preferred stock financing? If Gator were to issue 459,000 more preferred shares just like the ones it currently has outstanding, it could sell them for $35.29 a share but would incur flotation cost of $3.11 per share. What are the flotation costs for issuing the preferred shares and how should this cost be incorporated into the NPV of the project being financed?

a. The firm’s cost of preferred stock financing is what percent? (Round to two decimal places.)

b. The flotation costs adjusted initial outlay for issuing the preferred shares are $? (Round to the nearest dollar)

c. How should this cost be incorporated into the NPV of the project being financed? (Select the best choice below )

A. We can account for flotation costs when calculating NPV by adding them to the initial project outlay.

B. We can account for flotation costs when calculating NPV by adjusting the project’s discount rate

C. We can account for flotation costs when calculating NPV by subtracting them from the initial project outlay.

D. We can account for flotation costs when calculating NPV by issuing more shares than initially anticipated.

4. (Computing interest tax savings) Dharma supply has earnings before interest and taxes (EBIT) of $540,000, interest expenses of $325,000, and faces a corporate tax rate of 34 percent.

a. Dharma’s supply’s net income is $. (Round to the nearest dollar)

b. If it didn’t have any debt, Dharma Supply’s net income is $. (Round to the nearest dollar)

c. The firm’s interest tax savings are $. (Round to the nearest dollar)

5. (Capital Asset Pricing Model) The expected return for the general market is 12.0 percent, and the risk premium in the market is 7.8 percent. Tasaco, LBM, and Exxos have betas of 0.841, 0.691, and 0.569, respectively. What are the appropriate expected rates of return for the three securities?

a. The appropriate expected return of Tasaco is what percent? (Round to two decimal places.)

b. The appropriate expected return of LBM is what percent? (Round to two decimal places.)

c. The appropriate expected return of Exxos is what percent? (Round to two decimal places.)