ch20 problem 28

# ch20 problem 28 - 3 Cost of Capital Problem 28 Cost of...

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1 Cost of Capital: Problem 28 20 – year bonds at par, 5% annual coupon Net proceeds will be \$980 per bond \$2 preferred dividend, Net proceeds \$22 Common equity beta = 1.10 Risk-free rate = 1% Required market return = 10% Price \$30, Net proceeds \$28.50 Tax rate = 20%

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Cost of Capital: Problem 28 a.Determine the firm’s cost of long-term debt, preferred shares, and common 2
Cost of Capital: Problem 28 Cost of Debt: By financial calculator: Set P/Y = C/Y =1, PMT = 50(1 - .20) = \$40; PV = -980; FV = 1,000; N = 20. Compute I/Y = 4.15%, which is the firm’s annual after-tax cost of debt.

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