75 cptiy5ytm5210 componentcostofpreferredstock

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: mponent cost of debt Interest is tax deductible, so A­T kd = B­T kd (1­T) = 10% (1 ­ 0.40) = 6% Use nominal rate. Flotation costs are small, so ignore them. Example 2: Cost of Debt Example 2: Cost of Debt Suppose we have a bond issue currently outstanding that has 25 years left to maturity. The coupon rate is 9% and coupons are paid semiannually. The bond is currently selling for $908.72 per $1000 bond. What is the cost of debt? N = 50; PMT = 45; FV = 1000; PV = ­908.75; CPT I/Y = 5%; YTM = 5(2) = 10% Component cost of preferred stock Component cost of preferred stock WACC = wdkd(1­T) + wpkp + wcks kp is the marginal cost of preferred stock. The rate of return investors require on the firm’s preferred stock. Cost of Preferred Stock Cost of Preferred Stock Reminders Preferred stock generally pays a constant dividend each period Dividends are expected to be paid every period forever Preferred stock is a perpetuity, so we take the perpetuity formula, rearrange and solve for KP Example...
View Full Document

This document was uploaded on 01/14/2014.

Ask a homework question - tutors are online