Reference no: EM131814689

1. What is the cost of 4% Bond of $1000 issued by XYZ corporation ? The company’s effective tax rate is 25%. Debentures to be redeemed after 5 years. Issue expense 0.5%

Hints: Find out cash flows and IRR. Cost of bond is IRR of cash flows.

The company gets $ 995 per bond and pay interest after tax saving $ 30 per year.

2. What is the cost of 4% Preference Shares of $100 issued by XYZ corporation ? The company’s effective tax rate is 25%. 4% Preference shares mean that the preference shares pay 4% dividend per year. Issue expense 1%. Preference shares will be redeemed after 5 years at premium of $5.

Hints: The company gets $990 per preference share and pay dividend of $40 per share. There is np tax saving on preference dividend.

3. (a) Find of cost of equity shares applying constant earning model

Par value of equity share $ 10

Current EPS $1 which is expected to remain constant.

Current market price per share $60.

Hints : Cost of equity = Earning / Current Market Price

(b) Find of cost of equity shares applying constant earning growth model Par value of equity share $ 10

Current EPS $1 which is expected to grow @ 4% p.a.

Current market price per share $60.

Hints : Cost of equity ( Ke) = [ Current Earning x (1+ Earning Growth Rate) / Current Market Price] + Earning Growth Rate

E0 (1+g)