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problem1: Compute the after tax cost of a 25 million dollar debt issue that Pullman Manufacturing Corporation (40% marginal tax rate) is planning to place privately with a large insurance company. This long-term issue will yield 6.6 percent to the insurance company.

problem2: Compute after tax cost of preferred stock for Bozeman-Western Airlines, Inc., which is planning to sell $10 million of $4.50 cumulative preferred stock to the public at a price of 48 dollar a share. The company has a marginal tax rate is 40 percent

problem3:  The given financial information is available on Fargo Fabrics, Inc.

Current per-share market price = $20.25

Current per-share dividend = $1.12

Current per-share earnings =$2.48

Beta = .90

Expected market risk premium = 6.4%

Risk free rate [20 year treasury bonds] = 5.2%

Past ten years earnings per share:

20x1    $1.39   20x6    $1.95

20x2    1.48     20x7    2.12

20x3    1.60     20x8    2.26

20x4    1.68     20x9    2.40

20x5    1.79     20x10 2.48

This past earnings growth trend is expected to carry on for the foreseeable future. The dividend payout ratio has remained approximately constant over the past 10 years & is expected to remain at current levels for the foreseeable future.

Compute the cost of equity capital using the following methods:

[A]      The constant growth rate dividend capitalization model approach

[B]      The capital asset pricing model approach.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M919107

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