Old Exam Questions - Cost of Capital Page 25 of 27 Pages • The company has corporate bonds outstanding with an 9 percent annual coupon that are trading at par. • New debt can be issued as a private placement (no flotation expense) and will have the same level of risk as the firm’s current debt. • The company’s tax rate is 40 percent. • The risk-free rate is 4 percent. • The market risk premium is 6 percent. • The stock’s beta is 1.5. • The company expects to pay a dividend on its common stock of $2.20 per share next year (D 1 ). • The company’s ROE is 20% and its dividend payout rate is 73%. • The current stock price (P0 ) is $28.95 per share. • If the firm issues new shares of common stock, they will sell for $27.50 per share (a slight discount from the current price), and the firm will have to pay flotation expense of 10.0% ($2.75). • Each of the projects to be taken on has the same degree of risk as the current projects of the firm.
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.