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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?
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