{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

# Quiz 9 - K p = D p P p – F = 6 70 – 2.50 = 8.89 3...

This preview shows page 1. Sign up to view the full content.

FIN 360 Quiz #9 Name: _Jeremy Pflug _________ Ramco Industries wants to compute the weighted average cost of capital (WACC). Answer the following questions. 1. Bonds issued by Ramco pays 8.8% annual interest, have a par value of \$1,000 and 25 years to maturity. The bonds are currently selling for \$890.78. Ramco has a 25% tax rate. What is the after-tax cost of debt? 882.19 = 88 x PVIFA(YTM, 25) + 1,000  PVIF(YTM, 25) 882.19 < 1,000, so, YTM > 8.8% If YTM = 9% B0 = 88 x PVIFA(9%, 25) + 1,000 x PVIF(9%, 25) = 88 x 9.823 + 1,000 x 0.116 = \$980.42 If YTM = 10% B0 = 88 x PVIFA(10%, 25) + 1,000 x PVIF(10%, 25) = 88 x 9.077 + 1,000 x 0.092 = \$890.78 YTM = 10% After Tax Cost of Debt = 10% x (1-25%) = .1 x .75 = 7.5% 2. Preferred stocks issued by Ramco pay an annual dividend of \$6. The preferred stock price is \$70. The flotation cost is \$2.5 per share. What is the cost of preferred stock?
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: K p = D p / P p – F = 6 / 70 – 2.50 = 8.89% 3. Common stocks issued by Ramco will pay a dividend of \$2.5 next year. The stock has an estimated growth rate of 8% and is currently selling for \$50. The flotation cost is \$3 per share. What is the cost of retained earnings? What is the cost of new common stock? Cost of Retained Earnings = K e = (D 1 / P ) + g = (2.5 / 50) + 8% = 13% Cost of New Common Stock = (D 1 / P- F) + g = (2.5 / 50-3) + 8% = 13.32% 4. If Ramco’s capital structure is 35% in debt, 15% in preferred stock, 10% in retained earnings, and 40% in common stock, what is the weighted average cost of capital? Cost (After Tax) Weights Weighted Costs Debt (K d ) 7.5 % 35% 2.625 % Preferred Stock (K p ) 8.89 % 15% 1.33 % Common Equity (K e ) 13 % 50 % 6.5 % Weighted Avg Cost (K a ) 10.455 %...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online