Chapter 9 The Cost of Capital

65) Alarm Systems Corporation's preferred stock pays a dividend of $3.60 and sells for $28.00. Alarm Systems Corporation has a marginal tax rate of 35%. What is the cost of preferred financing?

66) NewLinePhone Corp. is very risky, with a beta equal to 2.8 and a standard deviation of returns of 32%. The risk free rate of return is 3% and the market risk premium is 8%. NewLinePhone's marginal tax rate is 35%. Use the capital asset pricing model to estimate NewLinePhone's cost of retained earnings.

67) Dickerson Corporation's common stock is currently selling for $38. Last year's dividend was $4.00 per share. Investors expect dividends to grow at an annual rate of 7 percent indefinitely. Flotation costs of 4% will be incurred when new stock is sold.

a. What is the cost of internal common equity?

b. What is the cost of new common equity?

68) Last year Gator Getters, Inc. had $50 million in total assets. Management desires to increase its plant and equipment during the coming year by $12 million. The company plans to finance 40 percent of the expansion with debt and the remaining 60 percent with equity capital. Bond financing will be at a 9 percent rate and will be sold at its par value. Common stock is currently selling for $50 per share, and flotation costs for new common stock will amount to $5 per share. The expected dividend next year for Gator is $2.50. Furthermore, dividends are expected to grow at a 6 percent rate far into the future. The marginal corporate tax rate is 34 percent. Internal funding available from additions to retained earnings is $4,000,000.

a. What amount of new common stock must be sold if the existing capital structure is to be maintained?

b. Calculate the weighted marginal cost of capital at an investment level of $12 million.

69) The common stock for El Viss Company currently sells for $20 per share. The firm just paid a dividend of $1.50, and the dividend three years ago was $1.30. Dividends per share are anticipated to grow at the same rate in the future as they have over the past three years. Flotation costs for new shares will be 6% of the selling price. Calculate the following:

a. the cost of retained earnings

b. the cost of external equity capital

70) A company is going to issue a $1,000 par value bond that pays a 7% annual coupon. The company expects investors to pay $942 for the 20-year bond. The expected flotation cost per bond is $42, and the firm is in the 34% tax bracket. Compute the following:

a. The yield to maturity on the firm's bonds

b. The firm's after-tax cost of existing debt

c. The firm's after-tax cost of new debt

71) Toto and Associates' preferred stock is selling for $27.50 a share. The firm nets $25.60 after issuance costs. The stock pays an annual dividend of $3.00 per share. What is the cost of existing, and new, preferred stock respectively?

72) Sutter Corporation's common stock is selling for $16.80 a share. Last year Sutter paid a dividend of $.80. Investors are expecting Sutter's dividends to grow at an annual rate of 5% per year. What is the cost of internal equity?

73) Gibson Industries is issuing a $1,000 par value bond with an 8% annual interest coupon rate that matures in 11 years. Investors are willing to pay $972, and flotation costs will be 9%. Gibson is in the 34% tax bracket. What will be the after-tax cost of new debt for the bond?

74) The preferred stock of Wells Co. sells for $17 and pays a $1.75 dividend. The net price of the stock after issuance costs is $15.30. What is the cost of capital for new preferred stock?