calculate the: -after-tax cost of debt -the cost of preferred stock -the cost of equity from retained earnings using the DCF method -the cost of newly issued common stock using the DCF method

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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calculate the:

-after-tax cost of debt

-the cost of preferred stock

-the cost of equity from retained earnings using the DCF method

-the cost of newly issued common stock using the DCF method

Here is the condensed 2019 balance sheet for Sunrise Company (in thousands of dollars):
Condensed 2019 Balance Sheet
2019
Current assets
$2,000
Net Fixed assets
3,000
Total assets
$5,000
Accounts payable and accurals
$900
Short term debt
100
Long term debt
|1,100
Preferred Stock (10,000 shares)
250
Common Stock (50,000 shares)
|1,300
Retained earnings
|1,350
Total common equity
$2,650
Total liabilities and equity
$5,000
Sunrise's earnings per share last year were $3.20. The common stock sells for $55.00, last year's
dividend (Do)was $2.10, and a flotation cost of 10% would be required to sell new common stock.
Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Sunrise's
preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30.00 per share.
The firm's before-tax cost of debt is 10%, and its marginal tax rate is 25%. The firm's currently
outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%,
the risk-free rate is 6%, and Sunrise's beta is 1.516. The firm's total debt, which is the sum of the
company's short-term debt and long-term debt, equals $1.2 million.
Use this data to answer the questions in the assignment.
Transcribed Image Text:Here is the condensed 2019 balance sheet for Sunrise Company (in thousands of dollars): Condensed 2019 Balance Sheet 2019 Current assets $2,000 Net Fixed assets 3,000 Total assets $5,000 Accounts payable and accurals $900 Short term debt 100 Long term debt |1,100 Preferred Stock (10,000 shares) 250 Common Stock (50,000 shares) |1,300 Retained earnings |1,350 Total common equity $2,650 Total liabilities and equity $5,000 Sunrise's earnings per share last year were $3.20. The common stock sells for $55.00, last year's dividend (Do)was $2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Sunrise's preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30.00 per share. The firm's before-tax cost of debt is 10%, and its marginal tax rate is 25%. The firm's currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Sunrise's beta is 1.516. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $1.2 million. Use this data to answer the questions in the assignment.
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