Problem 1 A company issues 15-year, $1,000 par-value bonds, with a coupon rate of 5%.

Problem 1

A company issues 15-year, $1,000 par-value bonds, with a coupon rate of 5%. The bonds are sold for $619.70. The tax rate is 30%. Compute the cost of debt before taxes and after taxes.

Problem 2

Suppose a company issues common stock to the public for $25 a share. The expected dividend is $2.50 per share and the growth in dividends is 8%. If the flotation cost is 10% of the issue proceeds, compute the cost of external equity, r_e.

Problem 3

Calculate the cost of preferred stock (r_PS) with the given information:

Par Value = $200

Current Price = $208

Flotation Cost = $16

Annual Dividend = 12% of Par

Problem 4

A company is investigating the effect on its cost of capital with respect to the tax rate. Suppose there is a capital structure of 20% debt, 10% preferred stock, and 70% common stock. The cost of financing with retained earnings isr_e = 12%, the cost of preferred stock financing isr_PS = 7%, and the before-tax cost of debt is r_d = 9%. Calculate the weighted average cost of capital (WACC) given a tax rate of 35%.

Problem 5

You have been hired as a consultant to help estimate the cost of capital. You have been provided with the following data: r_RF = 4.10%; RP_M = 5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of common from retained earnings?

Problem 6

A company is trying to estimate its cost of capital. The following data is provided: D₁ = $1.45; P₀ = $22.50; and g = 6.50% (constant). Based on the DCF approach, what is the cost of common from retained earnings?