Structured Finance Solutions Problems

# Structured Finance Solutions Problems - Chapter 10 Problems...

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Chapter 10 Problems 2. LL Incorporated's currently outstanding 11% coupon bonds have a yield to maturity of 8%. LL believes it could issue at par new bonds that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is LL's after-tax cost of debt? r d (1 - T) = 0.08(0.65) = 5.2%. 4. Burnwood Tech plans to issue some \$60 par preferred stock with a 6% dividend.</p><p>The stock is selling on the market for \$70.00, and Burnwood must pay flotation costs of 5% of the market price. What is the cost of the preferred stock? r ps = ) 05 . 0 1 ( 00 . 70 \$ ) 06 . 0 ( 60 \$ - = 50 . 66 \$ 60 . 3 \$ = 5.41%. 5. Summerdahl Resorts' common stock is currently trading at \$36 a share. The stock is expected to pay a dividend of \$3.00 a share at the end of the year (D1 _ \$3.00), and the dividend is expected to grow at a constant rate of 5% a year. What is the cost of common equity? P 0 = \$36; D 1 = \$3.00; g = 5%; r s = ? r s = 0 1 P D + g = (\$3.00/\$36.00) + 0.05 = 13.33%. 6. Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 4% and the yield on a 10-year T- bond is 6%. The market risk premium is 5.5%, but the stock market return in the previous years was 15%.

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