Fin Homework 15

# Fin Homework 15 - 1 Evaluate the firms mix of debt and...

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1. Evaluate the firms mix of debt and equity financing and determine the relative importance of each component. 2. Estimate the oppurtunity cost of each of the sources of financing. -Costs are equal to the investors required rate of return after adjusting the cost of debt for effects of taxes. 3. Calculate a weighted average of the costs of each source of financing. -Calculate the product of the after tax cost of each capital source used by the firm and the weight asscoicated with each source.

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Indicidual or component cost of capital Years 0 1 2 3 4 5 B Dividend \$1.05 \$1.10 \$1.16 \$1.21 \$1.27 \$1.34 Stock Price \$25.00 Growth Rate 5% B. Dividend \$1.05 Growth Rate 5.00% Stock Price \$25.00 Cost of Capital 9.20% C. Bond \$1,000.00 Coupon on Interest 12.00% New Issue Bond \$1,150.00 Maturity 20.00 Tax Rate

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Unformatted text preview: 34.00% Cost of Capital 10.41% D. Par Value \$100.00 New Issue Share \$85.00 Dividend 7.00% Cost of Capital = Cost of Common Equity 1 Market Price \$30.00 \$30.00 Dividends \$1.45 \$1.54 Growth Rate 6% 6% Flotation % 5% Flotation \$ \$1.50 Net Market Price \$28.50 Cost of Common Equity 11.12% Internal Common Equity Cost of common Equity 11.39% External Common Equity Cost of Debt (before-tax rate x (1-marginal tax)) Par Value \$1,000.00 Coupon 7% Maturity 14 Compounding m 2 Market Price \$958.00 Flotation % 4% given Flotation \$ \$38.32 Net Market Price \$919.68 Tax Rate 18% Before Tax Cost of 7.962% After Tax 6.53% Cost of prefered stock Selling 36 Dividend 2.7 Floatation % 3% Floatation \$ 1.08 Net Market Price 34.92 Cost of Capital 7.73%...
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