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Company issues bonds at a price of $925 and a flotation cost of 1%. The bond has...

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Finance

Company issues bonds at a price of $925 and a flotation cost of1%.

The bond has an annual coupon rate of 5% and a maturity of 10years.

The corporate tax rate is 40%.

Common stock sells at $30 per share and new issues would have aflotation cost of $2.

The last dividend paid was $3 per share and the growth rate ofdividends is 6%.

Your firm’s capital structure is 20% debt, 20% retainedearnings, and 60% common stock.

  1. Compute the after-tax cost of debt
  2. Compute the cost of common stock
  3. Compute the cost of retained earnings
  4. Compute the Weighted Average Cost ofCapital

Answer & Explanation Solved by verified expert
3.9 Ratings (706 Votes)
a Proceeds from bonds Price1flotation percentage 925100191575 K N Bond Price Annual Coupon1 YTMk Par value1 YTMN k1 K 10 91575 510001001    See Answer
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Company issues bonds at a price of $925 and a flotation cost of1%.The bond has an annual coupon rate of 5% and a maturity of 10years.The corporate tax rate is 40%.Common stock sells at $30 per share and new issues would have aflotation cost of $2.The last dividend paid was $3 per share and the growth rate ofdividends is 6%.Your firm’s capital structure is 20% debt, 20% retainedearnings, and 60% common stock.Compute the after-tax cost of debtCompute the cost of common stockCompute the cost of retained earningsCompute the Weighted Average Cost ofCapital

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