Calculate after-tax cost of new preferred stock financing

Assignment Help Financial Management

Reference no: EM132016057

A firm that is in the 35% tax bracket forecasts that it can retain $3 million of new earnings plans to raise new capital in the following proportions:

50% from 20-year bonds with a flotation cost of 5% of face value. Their current bonds are selling at a price of 92 (92% of face value), have 5 years remaining, have an annual coupon of 7.2%, and their investment bank thinks that new bonds will have a 50 basis point (0.50%) higher yield-to-maturity than their current 5 year bonds due to their longer term.

10% from preferred stock with a flotation cost of 6% of face value. The firm currently has an outstanding issue of $50 face value fixed-rate preferred stock with an annual dividend of $3 per share, and the stock is currently selling at $36 per share. Any newly issued preferred stock will continue with the $50 par-value, and will continue the $3 dividend.

40% from equity. Their common dividend payout ratio is 60%, they recently paid a dividend of $1.60 per share, the dividend is expected to grow to $3.50 in 10 years, and is expected to continue this growth rate into the foreseeable future. The common stock has a current market price of $19, and their investment banker suggests a flotation cost of 6% of market value on new common equity.

Part 1: Calculate the after-tax cost of the new bond financing. ___________

Part 2: Calculate the after-tax cost of the new preferred stock financing. ______

Part 3: Calculate the after-tax cost of retained earnings financing. _______

Reference no: EM132016057

Questions Cloud

Consider the production cost information : Consider the production cost information for Mama Italiano Sauce given below: Mama Italian Sauce Production Cost Budget April 2008.

What is the rate of return from this investment : Assuming that the required rate of return remained at 8%, what would the selling price be? What is the rate of return from this investment?

Calculate the copy department costs allocated to sales : Triton Company's copy department, calculate the copy department costs allocated to sales.

Draw the cost of capital schedule for the firm : Draw the cost of capital schedule for the firm. This schedule does not need to be elaborate.

Calculate after-tax cost of new preferred stock financing : Calculate the after-tax cost of the new bond financing. Calculate the after-tax cost of the new preferred stock financing.

Funding sources is federal income tax adjustment applicable : what funding sources is the federal income tax adjustment applicable?

The constant dividend growth model-enterprise value equals : The constant dividend growth model. Enterprise value equals the.

Calculate the ratio of internal capital recovery : Calculate the present value if the MARR is 10% annual compound. Calculate the ratio of internal capital recovery.

Calculate after-tax cost of the new common equity financing : Calculate the after-tax cost of the new common equity financing. Calculate the company's WACC using retained earnings as the source of equity.

User Account

All Pages