Loose Leaf for Foundations of Financial Management Format: Loose-leaf
17th Edition
ISBN: 9781260464924
Author: BLOCK
Publisher: Mcgraw Hill Publishers
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Chapter 11, Problem 15P
Summary Introduction
To calculate: The cost of fixed income securities for Riley Coal Inc., and determine whether the treasurer is correct as per the assumptions.
Introduction:
Cost of
It refers to the dividend amount annually paid by the company on its preferred stock. Such dividend is not tax deductible and can be calculated by dividing the annual preferred dividend with the current market price of the preferred stock.
Cost of debt (Kd):
It refers to the effective interest rate paid by the company on its debt, such as bonds and loans. Such interest payments are tax deductible.
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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.
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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
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…
Chapter 11 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
Ch. 11 - Why do we use the overall cost of capital for...Ch. 11 - How does the cost of a source of capital relate to...Ch. 11 - Prob. 3DQCh. 11 - Why is the cost of debt less than the cost of...Ch. 11 - What are the two sources of equity (ownership)...Ch. 11 - Explain why retained earnings have an associated...Ch. 11 - Why is the cost of retained earnings the...Ch. 11 - Why is the cost of issuing new common stock Kn...Ch. 11 - How are the weights determined to arrive at the...Ch. 11 - Explain the traditional, U-shaped approach to the...
Ch. 11 - Prob. 11DQCh. 11 - What effect would inflation have on a company’s...Ch. 11 - What is the concept of marginal cost of capital?...Ch. 11 - In March 2010, Hertz Pain Relievers bought a...Ch. 11 - Speedy Delivery Systems can buy a piece of...Ch. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Calculate the aftertax cost of debt under each of...Ch. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Airborne Airlines Inc. has a $1,000 par value bond...Ch. 11 - Russell Container Corporation has a $1,000 par...Ch. 11 - Prob. 11PCh. 11 - KeySpan Corp. is planning to issue debt that will...Ch. 11 - Medco Corporation can sell preferred stock for $90...Ch. 11 - Wallace Container Company issued $100 par value...Ch. 11 - Prob. 15PCh. 11 - Murray Motor Company wants you to calculate its...Ch. 11 - Compute KeandKn under the following...Ch. 11 - Business has been good for Keystone Control...Ch. 11 - Prob. 19PCh. 11 - Evans Technology has the following capital...Ch. 11 - Sauer Milk Inc. wants to determine the minimum...Ch. 11 - Given the following information, calculate the...Ch. 11 - Prob. 23PCh. 11 - Brook's Window Shields Inc. is trying to calculate...Ch. 11 - Prob. 25PCh. 11 - Prob. 26PCh. 11 - Delta Corporation has the following capital...Ch. 11 - The Nolan Corporation finds it is necessary to...Ch. 11 - The McGee Corporation finds it is necessary to...Ch. 11 - Eaton Electronic Company’s treasurer uses both...Ch. 11 - Compute the $ change in “Total Assets� over...Ch. 11 - Do the same computation for “Stockholders’...Ch. 11 - Do the same computation for “Long-Term Debt.�Ch. 11 - Prob. 5WE
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