The cost of equity using the geometric dividend growth rate is:
R
E
= [$1.43(1.0803)/$45.00] + .0803 = .1146 or 11.46%
5.
The cost of preferred stock is the dividend payment divided by the price, so:
R
P
= $6/$96 = .0625 or 6.25%
6.
The pretax cost of debt is the YTM of the company’s bonds, so:
P
0
= $1,070 = $35(PVIFA
R%,30
) + $1,000(PVIF
R%,30
)
R = 3.137%
YTM = 2 × 3.137% = 6.27%
And the aftertax cost of debt is:
R
D
= .0627(1 – .35) = .0408 or 4.08%
7.
a.
The pretax cost of debt is the YTM of the company’s bonds, so:
P
0
= $950 = $40(PVIFA
R%,46
) + $1,000(PVIF
R%,46
)
R = 4.249%
YTM = 2 × 4.249% = 8.50%
b.
The aftertax cost of debt is:
R
D
= .0850(1 – .35) = .0552 or 5.52%
c.
The after-tax rate is more relevant because that is the actual cost to the company.
8.
The book value of debt is the total par value of all outstanding debt, so:
BV
D
= $80,000,000 + 35,000,000 = $115,000,000
To find the market value of debt, we find the price of the bonds and multiply by the number
of bonds. Alternatively, we can multiply the price quote of the bond times the par value of
the bonds. Doing so, we find:
MV
D
= .95($80,000,000) + .61($35,000,000)
MV
D
= $76,000,000 + 21,350,000
MV
D
= $97,350,000
The YTM of the zero coupon bonds is:
P
Z
= $610 = $1,000(PVIF
R%,14
)
R = 3.594%
YTM = 2 × 3.594% = 7.19%
So, the aftertax cost of the zero coupon bonds is: