Please correct answer and don't use hand rating The treasurer of Riley Coal Company is asked to compute the cost of fixed income securities for her corporation. Even before makingthe calculations, she assumes the aftertax cost of debt is at least 3 percent less than that for preferred stock.Debt can be issued at a yield of 11.6 percent, and the corporate tax rate is 40 percent. Preferred stock will be priced at $76 and pay adividend of $7.00. The flotation cost on the preferred stock is $8.a. Compute the aftertax cost of debt.Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.Aftertax cost of debt%b. Compute the aftertax cost of preferred stock.Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.Aftertax cost of preferred stock%

The problem involves the determination of the after tax cost of debt and the cost of preferred…

Answered: The treasurer of Riley Coal Company is…

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

Problem 1PS

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The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 3 percent less than that for preferred stock. Debt can be issued at a yield of 11.0 percent, and the corporate tax rate is 20 percent. Preferred stock will be priced at $60 and pay a dividend of $6.40. The flotation cost on the preferred stock is $6. a. Compute the aftertax cost of debt. (Do not round intermediate calculations. Input the answer as a percent rounded to 2 decimal places.) Compute the aftertax cost of preferred stock. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Based on the facts given above, is the treasurer correct?
The treasurer of Sutton Security Systems is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 1 percent less than that for preferred stock. Debt can be issued at a yield of 7.5 percent, and the corporate tax rate is 40 percent. Preferred shares will be priced at $68 and pay a dividend of $3.50. The flotation cost on the preferred stock is $5. (Do not round intermediate calculations. Round the final answers to 2 decimal places.) a. Compute the aftertax cost of debt. Aftertax cost of debt % b. Compute the aftertax cost of preferred stock. Aftertax cost of preferred stock % c. Based on the facts given above, is she correct? multiple choice Yes No
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The total market value of the common stock of the Okefenokee Real Estate Company is $11.5 million, and the total value of its debt is $7.3 million. The treasurer estimates that the beta of the stock is currently 1.2 and that the expected risk premium on the market is 9%. The Treasury bill rate is 3%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. a. What is the required return on Okefenokee stock? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. b. Estimate the company cost of capital. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. What is the discount rate for an expansion of the company's present business? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. d. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged…
Abby Sane decided to buy corporate bonds instead of stock. She desired to have the fixed-interest payments. She purchased 6 bonds of Meg Corporation 12.00% at 88.00%. As the stockbroker for Abby (assume a $3 commission per bond), calculate the following. a. Total cost of the purchase. Total cost b. Total annual interest to be received. Total annual interest c. Current yield. (Round your answer to the nearest tenth percent.) Current yield % ..... ..... ......
The total market value of the common stock of Company A is $12 million, and the total value of its debt is $8 million. The treasurer estimates that the beta of the stock is currently 1.20 and that the market risk premium is 7.5%. The Treasury bill rate is 2.5%. Assume for simplicity that Company A debt is risk-free. The Company's tax rate is 28% . a) What is the pre-tax cost of capital for Company A? b) What is the WACC for Company A ?
The total market value of the common stock of the Okefenokee Real Estate Company is $11.5 million, and the total value of its debt is $7.5 million. The treasurer estimates that the beta of the stock is currently 1.8 and that the expected risk premium on the market is 7%. The Treasury bill rate is 3%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged optical manufacturers is 1.05. Estimate the required return on Okefenokee's new venture. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Abby Sane decided to buy corporate bonds Instead of stock. She desired to have the fixed-interest payments. She purchased 5 bonds of Meg Corporation 11.75% at 88.25%. As the stockbroker for Abby (assume a $5 commission per bond), calculate the following. a. Total cost of the purchase. Note: Round your answer to the nearest cent. Total cost b. Total annual Interest to be received. Note: Round your answer to the nearest cent. Total annual interest and colle bilinimu suh c. Current yield. Note: Round your answer to the nearest tenth percent. HINGS Current yield %
Kolby Corp. is comparing two different capital structures. Plan I would result in 900 shares of stock and $65,700 in debt. Plan II would result in 1,900 shares of stock and $29,200 in debt. The interest rate on the debt is 10 percent. Assume that EBIT will be $8,500. An all-equity plan would result in 2,700 shares of stock outstanding. Ignore taxes. What is the price per share of equity under Plan I? Plan II?
Ancova Bhd. wants to calculate its cost of capital. The company employs you as the financial consultant to help with the calculations. You have been provided with the following information: Debt: the company has issued corporate bonds 8 years ago. The bond has an estimated pre-tax cost of 8%. Preferred: the company has issued a 6% preferred stock with par value of RM10. The average market price of the preferred stock is RM10. The flotation cost of new preferred stock is 2% of market price. Common: the company has recently paid dividend of RM0.16 per common share, at which the market price is RM3.00 per share. The company believes the dividend growth of 5% will maintain for a long future. The flotation cost of new common stock is 4% of market price. The current capital structure of the company is 35% debt, 5% preferred stocks, and 60% common stock. The company falls under 25% tax bracket. (i) Suppose the retained earnings of Ancova Bhd. is available, calculate the weighted…
Company Z has a total value of $ 500,000. On its balance sheet, it has a debt of $ 150,000 paid at 3%. The shareholders ask for a dividend of 10% a year. Company Z is yearly audited and pays all its due taxes. What is the capital structure for Z? What would be the risk profile of Z? How can capital structure influence the risk profile of Z?

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