Question 1:
Cost of debt. For each of the following bonds, calculate the after-tax cost of debt. Assume the coupons are paid semiannually, that the tax rate is 40%, and that we are dealing with $1,000 of par value.
|
Bond
|
Life
|
Underwriting fee
|
Discount (-) or Premium (+)
|
Coupon rate
|
|
A
|
20 years
|
$20
|
-$5
|
9%
|
|
B
|
16
|
4% of par
|
+10
|
10.4
|
|
C
|
15
|
3% of par
|
-15
|
6.8
|
|
D
|
25
|
$15
|
None
|
9.3
|
|
E
|
22
|
2% of par
|
-20
|
5.9
|
Question 2:
Cost of preferred equity. Taylor systems has just issued preferred shares. The shares have a 12 percent annual dividend and a $100 stated value and were sold at $97.50 per share. In addition, flotation costs of $2.50 per share must be paid.
a. Calculate the cost fo the preferred shares. What is the after-tax cost of the preferred shares?
b. If the firm sells the preferred stock with a 10 percent annual dividend and nets $90 after flotation costs, what is its cost?