CH12 - cost of debt is actually less than preferred stock financing That is because interest payments are tax detectable where as dividends are not

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1. D1 = $2.20 * 1.06 = 2.33 DY = 2.33/43 = 5.42% 5.42% + 6% = 11.42% 2. RP = 12 – 4.5 = 7.5 Cost of equity = .045 + .075 * 1.1 Cost of equity = 12.75% 6. Pretax YTM = 5.68% After tax cost of debt = .0568 * (1-.38) After tax cost of debt = 3.71% 9. a. Weights Costs Weighted Cost Common Stock .60 12.5 7.5% Preferred Sock .05 5.5 .27% Debt .35 7.2 * (1-.35) = 4.68 1.64% Total 1 9.41% b. First the optimal capital structure can be different for every situation. Secondly the after tax
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Unformatted text preview: cost of debt is actually less than preferred stock financing. That is because interest payments are tax detectable where as dividends are not. 10. Weights Costs Weighted Cost Equity 1/1.65= .61 13 7.88% Debt .65/1.65 = .39 8 * (1-.35) = 5.2 2.03% Total 1 9.93%...
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This note was uploaded on 01/23/2012 for the course MGT 111 taught by Professor Unknown during the Spring '11 term at Washington State University .

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