Homework Problems - Cost of Capital
1. The yield to maturity on existing bond debt is 13%. Calculate the after tax cost of debt when the tax rate is 0%, 20%., and 30%.
2. A company plans to issue $100 par preferred stock with an 11% dividend. The stock will sell for $97.00. Floatation cost will be 5% of the market price. Calculate the cost of preferred stock
3. A company's stock that recently paid a dividend of $2.00 expects to pay a dividend of $2.14 at the end of this year. The shares sell for $23.00 per share. The firm's bonds earn a 12% return, beta is 1.6, the risk-free rate is 9%, and the expected rate of return is 13%.
Calculate the cost of equity (retained earnings) using.
a) the DCF method
b) the CAPM method
c) the bond-yield-plus-risk-premium method
4. A firm's shares sell for $36, the next dividend will be $3.18, its growth rate is 6%. New shares can be sold to net $32.40.
a. What is the firm's cost of internal equity (retained earnings)?
b. What is the firm's percentage floatation costs?
c. What is the firm's cost of external equity (new shares)?
5. A firm's cost of common equity is 16%. Its new bonds will have a 13% coupon and its tax rate is 40%. The capital section of their balance sheet consists of $1,152,000 long-term debt and $1,728,000 equity. Calculate their WACC.
6. A firm expects net income next year of $30 million. Its dividend payout ratio is 40%, and its debt to asset ratio is 60%. There is no preferred stock.
What amount of retained earnings will the firm generate next year?
At what level of financing will there be a break point in the Marginal Cost of Capital (MCC) schedule?