This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: 5. The cost of preferred stock is the dividend payment divided by the price, so: R P = $6/$96 = .0625 or 6.25% 7. a. The pretax cost of debt is the YTM of the company’s bonds, so: P = $950 = $40(PVIFA R%,46 ) + $1,000(PVIF R%,46 ) R = 4.249% YTM = 2 × 4.249% = 8.50% 1 b. The aftertax cost of debt is: R D = .0850(1 – .35) = .0552 or 5.52% c. The aftertax rate is more relevant because that is the actual cost to the company. 9. a. Using the equation to calculate the WACC, we find: WACC = .60(.14) + .05(.06) + .35(.08)(1 – .35) = .1052 or 10.52% b. Since interest is tax deductible and dividends are not, we must look at the aftertax cost of debt, which is: .08(1 – .35) = .0520 or 5.20% Hence, on an aftertax basis, debt is cheaper than the preferred stock. 10. Here we need to use the debtequity ratio to calculate the WACC. Doing so, we find: WACC = .15(1/1.65) + .09(.65/1.65)(1 – .35) = .1140 or 11.40% 2...
View
Full
Document
This note was uploaded on 05/18/2011 for the course FINANCE Fin3300 taught by Professor Mosley during the Summer '10 term at CSU East Bay.
 Summer '10
 Mosley
 Finance, Cost Of Capital

Click to edit the document details