KIN356ProblemSet8 - Griffin Warner K IN356 Problem Set...

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Unformatted text preview: Griffin Warner K IN356 Problem Set Eight 1) The cost of retained earnings is equivalent to the required rate of return on common stock because they are a major part of the companys equity enjoyed by the common stockholders. 2) Kd = Y (1-T) a. Kd = 8% (1-.18) = 8% (0.72) = 0.0576 b. Kd = 12% (1-.34) = 12% (0.66) = .0792 c. Kd = 10.6% (1-.85) = 10.6% (.15) = .0159 3) preferred stock = $70, flotation = $2.50, preferred stock $6/share dividends Kp = Dp/(Pp F) a. Kp = 6/(70-2.50) = 6/67.5 = .0888 b. No tax deduction for the issuing firm. 4) Kd = Y (1-T) Kd= 11% (1-.7) = .033 Kp = 4.80/(50-2.10) = 4.80/47.90 = 0.10 Cost of debt is almost 7 percent less than that for preferred stock, so she is correct but at the same time she grossly underestimated the difference. 5) Ke = (D1/Po) + g a. Ke = (4.20/55) + 5% = .076 + 5% = 0.126 b. Ke = (0.4/15) + 8% = .027 + 8% = 0.107 c. Ke = (2/32) + 5% = 0.113 d. Ke = (3/60) + 9% = 0.14 Kn = ((D1)/(Po F)) +g a. Kn = ((4.2/(55 3.8)) + 5% = .082 + 5% = 0.132a....
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This note was uploaded on 06/15/2011 for the course KIN 356 taught by Professor Warner during the Fall '09 term at University of Texas at Austin.

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KIN356ProblemSet8 - Griffin Warner K IN356 Problem Set...

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