2008-07-12_170218_Finance

_170218_Fi - = 6.53 b A new common stock issue that paid a $1.80 dividend last year The par value of the stock is $15 and earnings per share have

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Individual or component costs of capital) Compute the cost of the following: a). A bond that has $1,000 par value (face value0 and a contract or coupon interest rate of 11 percent. A new issue would have a flotation cost of 5 percent of the $1,125 market value. The bond matures in 10 years. The firm's average tax rate is 30 percent and its marginal tax rate is 34 percent. Net price after flotation costs = $1,125 (1 - .05) = $1,068.75 $1,068.7= = + 10 1 t t d ) k (1 $110 + 10 d ) k (1 000 , 1 $ + k d = 9.89% debt of cost tax After - = k d (1 - T) = 9.9%(1-.34)
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Unformatted text preview: = 6.53% b). A new common stock issue that paid a $1.80 dividend last year. The par value of the stock is $15, and earnings per share have grown at a rate of 7 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend-earnings ratio of 30 percent. The price of this stock is now $27.50, but 5 percent flotation costs are anticipated. k ncs = NP 1 D + g = ) 05 . 1 ( 50 . 27 $ ) 07 . 1 ( 80 . 1 $-+ + .07 = 0.1437 = 14.37%...
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This note was uploaded on 02/03/2012 for the course ECON 101 taught by Professor 123 during the Spring '97 term at University of Kelaniya.

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