Reference no: EM133227618

Cost of the different sources of capital financing

Problem 1:

Explain what the capital structure of a company is.

Problem 2:

It lists the sources of long-term financing used by companies to finance investment capital, in order from lowest to highest cost, and explains what is the factor that causes one source of capital to be more or less expensive than the other sources.

Problem 3:

Using the debt cost approximation formula, determine the pre-tax cost for a bond that sells at $925 of its even value and that pays a $85 coupon for 20 years. The issuance costs (flotation costs) are $5 per bonus. You will have to show the calculations to receive a score for your answer.

Problem 4:

For the case of problem 3, calculate the cost of debt after taxes if the company's tax liability is 40%. You will have to show the calculations to receive a score for your answer.

Problem 5:

Consider the issuance of preferential shares with an annual dividend of $12.00 per preferential share. These shares will be sold at $100 each. The floating cost is $8 per share.. Calculate the preferred capital cost. You will have to show the calculations to receive a score for your answer.

Problem 6:

The DupT corporation plans to issue common shares to finance its next capital investment project. The market price of the corporation's shares is $75 per share. It is expected to pay a dividend of $5 per share at the end of the year. The corporation has had an average annual growth of 6%. The cost of issuance is $2.50 per share. Determine the cost of equity capital using Gordon's constant growth method (Gordon Growth Model). You will have to show the calculations to receive credit for your answer.