# MGT325_M5_Spreadsheet_Exam - 1 Cost of Capital 2 Part A:...

This preview shows pages 1–4. Sign up to view the full content.

1 Cost of Capital

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
2 Part A: Current price of the debt = Current Price+ Current Price*3% = 900+900*3% = \$ 927 Maturity value of the debt = \$ 1000 Interest payment on the debt = (Maturity Value * Annual Interest)/2 = (\$1000*9%)/2 = \$ 45 Payment periods left on the debt = 20 Years * 12 = 240 Months Yield rate on the debt Yield to maturity (YTM) can be obtained by using the following formula. (Melicher and Norton, 2010). Par value of bond = \$1000 Selling Price = \$ 900 Number of maturity years (n) = 40 (20 years * 2) Coupon rate = 4.5% (9%/2) YTM= 5.09%
3 Annual yield on the debt = YTM*2 = 5.09*2 = 10.18% Calculation of cost of Debt: = Annual yield on the debt *(1-tax rate) = 10.18*(1-0.35) = 6.62% Calculation of cost of preferred stock Cost of preferred stock can be calculated by the using the below formula. (Melicher and Norton 2010) Where, K p = cost of preferred stock DPS = Dividend per preference share = \$5 CP = Current price = \$50 Then, cost of preferred stock will be - K p = 10.00% Calculation of cost of common equity

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 12/04/2011 for the course ECONOMICS 201 taught by Professor Rcollier during the Spring '10 term at Portland CC.

### Page1 / 7

MGT325_M5_Spreadsheet_Exam - 1 Cost of Capital 2 Part A:...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online