McGill Inc. has just issued 10-year bonds that have a face value of $1,000 with
ID: 2716469 • Letter: M
Question
McGill Inc. has just issued 10-year bonds that have a face value of $1,000 with a 12% coupon rate paid annually. The bonds sold for $960, but McGill Inc. had to pay $10 flotation costs as well. McGill Inc. has a 30% tax rate. What is the after tax cost of debt Answer: Jiffy Co. expects to pay a dividend of $1.00 per share in one year. The current price of Jiffy common stock is $45 per share. Flotation costs are $2.50 per share when Jiffy issues new stock. Jiffy Co.'s long-term growth in dividends is projected to be 5.5 percent indefinitely? a. What is the cost of internal common equity (retained earnings)? Answer: What is the cost of external common equity? Answer: JoJo has preferred stock with a current market price of $40 per share. The preferred stock pays an annual dividend of 5% based on a par value of $100. Flotation costs associated with the sale of preferred stock equal $1.50 per share. The company's marginal tax rate is 35%. Therefore, the cost of issuing new preferred stock is: Answer: The ABC Company is planning a $100 million expansion. The expansion is to be financed by selling $45 million in new debt and $55 million in new common stock. The before-tax cost of debt is 5 percent and the cost on equity is 12 percent. If the company is in the 35 percent tax bracket, what is the firm's weighted average cost of capital Answer: St. John's wants to borrow money to build a new business school. They need $25 million. They can borrow in the US at 4.5% or in the UK for 7.5% for 1 year. Assume the current exchange rate is $1.4: 1.0, what is the 1-year future exchange rate Answer:Explanation / Answer
1. Answer 9.128%
The after-tax cost of redeemable debt may be computed as
Kd= I ( 1-t ) + 1/n ( RV-NP ) / 1/2 ( RV + NP ), where I = annual interest, t= tax rate, n= number of years in which the debt is to be redeemed, RV= redeemable value of debt, and NP= net proceeds of the debt issue.
RV is $ 1000, NP = 960-10= $ 950, I = $ 120, n= 10
In this case therefore, Kd = 9.128%
2. Answer: a.Cost of retained earnings is 7.72%,
b. Cost of external equity is 7.85%
Cost of retained earnings are computed as D( 1+g)/ NP +g
Cost of equity is calculated as Ke = D/ NP +g, where D is expected dividend per share, NP is net proceeds per share, and g is the rate of growth in dividend.
4. The weighted average cost of capital is 8.06%
Capital Amount ($) million Cost of capital Weighted average cost of capital Debt 45 0.05 x0.65=0.0325 1.4625 Equity 55 0.12 6.60 Total 8.0625