Cost of Capital 25

Cost of Capital 25 - The company has corporat e bonds...

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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 (P 0 ) 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.

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