MGT325_M5_Spreadsheet_Exam

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

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1 Cost of Capital
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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%
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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
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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.

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

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