Quiz 9 - K p = D p / P p F = 6 / 70 2.50 = 8.89% 3. Common...

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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?
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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 Ramcos 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 %...
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This note was uploaded on 12/17/2011 for the course MBA 500 taught by Professor Dr.jones during the Spring '11 term at Morehead State.

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