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Prepare Freeform Answer For Assessment On Cost of Ca... : Cancel

1. The document provides instructions to compute the costs of various capital sources for different companies, including bonds, preferred stock, common stock, and weighted average cost of capital (WACC). 2. It includes 6 problems (A through F) related to calculating before-tax and after-tax bond costs, preferred stock costs, common stock costs, dividend growth rates, stock prices, and net proceeds from new issues. 3. The final problem asks to calculate the WACC for a company based on its target capital structure proportions and given costs of debt, preferred stock, and common equity.

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Clarisse Alimot
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66 views

Prepare Freeform Answer For Assessment On Cost of Ca... : Cancel

1. The document provides instructions to compute the costs of various capital sources for different companies, including bonds, preferred stock, common stock, and weighted average cost of capital (WACC). 2. It includes 6 problems (A through F) related to calculating before-tax and after-tax bond costs, preferred stock costs, common stock costs, dividend growth rates, stock prices, and net proceeds from new issues. 3. The final problem asks to calculate the WACC for a company based on its target capital structure proportions and given costs of debt, preferred stock, and common equity.

Uploaded by

Clarisse Alimot
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Prepare freeform answer for Assessment on Cost of

Ca...
 Cancel

Instructions:  Compute for what is required from each independent cases.  Show
solution in good form
 
Problem A:
Currently, Warren Industries can sell 15-year, P1,000 par value bonds paying annual
interest at 12% coupon rate.  As a result of current interest rates, the bonds can be sold
for P1,010 each.  Flotation costs of P30 per bond will be incurred in this process.  The
firm's tax rate is 30%
1.  How much is the net proceeds from the sale of the bond? (5 pts)
2.  Using excel, calculate the before and after-tax cost of debts? (10 pts)
3.  Using approximation formula, calculate the before and after-tax cost of debts? (10
pts)
 
Problem B:
4.  People's Consulting Group has been asked to consult on a potential preferred stock
offering by Brave New World.  This 15% preferred stock issue would be sold at its par
value of P35 per share.  Flotation costs would total P3 per share.  Calculate the cost of
this preferred stock? (5 points)
 
Problem C:
5.  Taylor Systems has just issued preferred stock.  The stock has 12% annual dividend
and a P100 par value share was sold for P110 per share.  In addition, flotation costs of
P3 must be paid.  Calculate the cost of this preferred stock? (5 points)
 
Problem D:
6.  Duke Energy has been paying dividends steadily for 20 years.  During that time,
dividends have grown at a compound annual rate of 7%.  If Duke Energy's current stock
price is P78 and the firm plans  to pay a dividend of P6.50 next year, what is Duke's
cost of common stock equity? (5 points)
 
Problem E:
Ross Textiles wishes to measure its cost of common stock equity.  The firm's stock is
currently selling for P57.50.  The firm expects to pay P3.40 dividend at the end of year
2015.  Dividends constantly grow at the rate of 6%
After underpricing and flotation costs, the firm expects to net P52 per share on a new
issue.
 
7.  Based on the above given information, how much is the net proceeds (Nn) that the
firm will actually receive? (5 pts)
8.  Based on the above given information and using the Gordon Growth model,
calculate the cost of retained earnings (rr) (5 pts)
9.  Based on the above given information and using the constant growth valuation
model, calculate the cost of new common stock (rn) (5 pts)
 
Problem F:
Oxy Corporation uses debt, preferred stock and common stock to raise capital.  The
firm's capital structure targets the following proportions:
debt, 55%
preferred stock, 10%
common stock, 35%
If the cost of debt is 6.7%, preferred stock costs 9.2% and common stock costs 10.6%,
what is Oxy's weighted average cost of capital (WACC)? 5 pts.
 
 
 
 

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