question archive 1) A firm is paying an annual dividend of $6

1) A firm is paying an annual dividend of $6

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1) A firm is paying an annual dividend of $6.00 for its preferred stock which is selling for $69.00. There is a selling cost of $3.00. What is the after-tax cost of preferred stock if the firm's tax rate is 35%? (Round your answer to 2 decimal places.)

10.54%

9.09%

11.24%

7.74%

2) A firm's stock is selling for $77. The next annual dividend is expected to be $3.00. The growth rate is 9%. The flotation cost is $8. What is the cost of retained earnings? (Round your answer to 2 decimal places.)

10.75%

11.55%

12.90%

14.35%

3) The coupon rate on an issue of debt is 9%. The yield to maturity on this issue is 10%. The corporate tax rate is 32%. What would be the approximate after-tax cost of debt for a new issue of bonds? (Round your answer to 2 decimal places.)

6.80%

8.95%

5.45%

8.25%

4) Firm X has a tax rate of 25%. The price of its new preferred stock is $68 and its flotation cost is $2.00. The cost of new preferred stock is 11%. What is the firm's dividend? (Round your answer to 2 decimal places.)

$9.41

$7.26

$5.91

$8.71

5) Expected cash dividends are $4.00, the dividend yield is 8%, flotation costs are 6% of price, and the growth rate is 3%. Compute cost of new common stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

12.51%

11.51%

13.61%

11.26%

6) The coupon rate on a debt issue is 5%. If the yield to maturity on the debt is 9%, what is the after-tax cost of debt in the weighted average cost of capital if the firm's tax rate is 33%? (Round your answer to 2 decimal places.)

7.38%

8.18%

4.68%

6.03%

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Answers:

Ans. 1 Option 2nd                 9.09%                
                       
  Cost of preferred stock (after tax)   = (Dividend / NP)* 100          
          ( 6 / 66) * 100          
          9.09%            
                       
  *Net proceed (NP) = Price - flotation cost              
      69 - 3                
      66                
                       
                       
Ans. 2 Option 3rd                  12.90%                
                       
  Cost of retained earnings     = ( DPS / Selling price * 100) + Growth rate        
        (3 / 77 * 100) + 9%            
        3.90% + 9%            
        12.90%              
                       
Ans. 3 Option 1st             6.80%                
                       
  Cost of debt (after tax)   =   Yield to maturity * ( 1 - tax rate)          
        10 %* ( 1 - 0.32)            
        6.80%              
                       
Ans. 4 Option 2nd                  $7.26                
                       
  Dividend per share = Net Proceed * cost of preferred stock          
      66 * 11%                
      7.26 per share              
                       
  *Net proceed (NP) = Price - flotation cost              
      68 - 2                  
      66                
                       
Ans. 5 Option 2nd                11.51%                
                       
  Cost of new common stock = (DPS /NP)*100 + Growth rate          
        (4 / 47) * 100 + 3%            
        8.51% + 3%            
        11.51%              
                       
  *Price = Dividend / Dividend yield              
    4 / 8%                  
    50                  
  *Net proceed (NP) = Price - flotation cost              
      50 - 6%                
      47                
                       
Ans. 6 Option 4th    =    6.03%                
                       
  Cost of debt in WACC (after tax)     =   Yield to maturity * ( 1 - tax rate)        
          9% * (1 - 0.33)          
          6.03%