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KIN356ProblemSet8

KIN356ProblemSet8 - G riffin Warner K IN356 Problem Set...

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Griffin Warner KIN356 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 company’s 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% = 0.132 b. Kn = ((0.4/(15 – 1)) + 8% = .0286 + 8% = 0.109 Kn = ((D1)/(Po – F)) +g c. Kn = ((2)/(32 – 2)) + 5% = .067 + 5% = 0.117 d. Kn = ((3)/(60-3.5)) + 9% = .053 + 9% = 0.143 6) Weighted Average cost of capital: 0.116 Debt = Kd = Y (1-T) = 11% (1-30%) = 11% (.7) = 0.077

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KIN356ProblemSet8 - G riffin Warner K IN356 Problem Set...

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