10.1/ AFTER-TAX COST OF DEBT The Heuser Company’s currently outstanding bonds have a 10% coupon and a 12% yield to maturity. Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax is 35%, what is Heuser’s after-tax cost of debt?
10.2/ COST OF PREFERRED STOCK Tunney Industries can issue perpetual preferred stock at a price of $47.50 a share. The stock would pay a constant annual dividend of $3.80 a share. What is the company’s cost of preferred stock, rp?
10.3/ COST OF COMMON EQUITY Percy Motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. The yield to maturity on the company’s outstanding bonds is 9%, and its tax rate is 40%. Percy CFO estimates that the company’s WACC is 9.96%. What is Percy’s cost of common equity?
10.4 Javits & Son's common stock currently trades at $30.00 a share. It is expected to pay an annual dividend of $3.00 a share at the end of the year (D1=$3.00), and the constant growth rate is 5% a year.
a) What is the company's cost of common equity if all of its equity comes from retained earning ?
b) If the company issued new stock, it would incur a 10% flotation cost. What would be the cost of equity from new stock ?
Project Size Rate of Return
A $1 million 12.0%
B 2 million 11.5
C 2 million 11.2
D 2 million 11.0
E 1 million 10.7
F 1 million 10.3
G 1 million 10.2
Assuming that each of these projects is just as risky as the firm’s existing assets, and the firm may accept all the projects or only some of them. Which set of projects should be accepted? EXPLAIN.
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