Problem 1
Rasmussen College – F490c – Module 05 Assignment | |
Problem 1 | |
1. | Find the after-tax cost of debt given that the company issues a $1,000 bond with a coupon rate of 8%, 20 years to maturity, and the market price is $940. The corporate tax rate is 40%. |
Problem 2
Rasmussen College – F490c – Module 05 Assignment | |
Problem 2 | |
2. | Using the CAPM, find the rate of return of common stock assuming that the risk-free rate is 7%, the company beta is 1.5, and the market return rate is 13%. |
Rate of return of common stock: |
Problem 3
Rasmussen College – F490c – Module 05 Assignment | |
Problem 3 | |
3. | Calculate the cost of preferred stock. The underwriting cost is 3% and the tax rate is 40%. |
dividend per share: | $13 |
stock price per share: | $100 |
cost of preferred stock: |
Problem 4
Rasmussen College – F490c – Module 05 Assignment | |
Problem 4 | |
4. | Calculate the weighted cost of capital from the information below. |
Asset | Value |
Bonds at7% coupon | $ 300,000 |
Preferred stock with $5 dividend | $ 240,000 |
Common stock | $ 360,000 |
Retained earnings | $ 300,000 |
$ 1,200,000 | |
Floating cost | 10% |
Dividend on common stock | $3 |
Expected growth rate of dividend on common stock | 6% |
Market price of common stock | $40 |
Market price of preferred stock | $50 |
Interests on bond paid annually | |
Bonds are selling at par | |
Tax rate | 40% |
The cost of retained earnings is | 13.95% |
The cost of new common stock is | 14.83% |
After-tax cost of debt is | |
Cost of preferred stock is | |
Weighted average cost of capital | 11.28% |
Problem 5
Rasmussen College – F490c – Module 05 Assignment | |
Problem 5 | |
5. | When calculating the cost of capital, we typically want to use the market values of each capital (bond, stock). Why do we prefer the market values? How does the cost of capital differ when using the market values compared to the book value computations? |
Explanation: