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The Cost of Equity and Flotation Costs
1. Suppose a company will issue new 20-year debt with a par value of $1,000 and a coupon rate of 9%, paid annually. The tax rate is 40%. If the flotation cost is 2% of the issue proceeds, then what is the after-tax cost of debt? Disregard the tax shield from the amortization of flotation costs. Round your answer to two decimal places.
2. Messman Manufacturing will issue common stock to the public for $35. The expected dividend and growth in dividends are $3.75 per share and 6%, respectively. If the flotation cost is 14% of the issue's gross proceeds, what is the cost of external equity, re? Round your answer to two decimal places.
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IBM has generated annual dividend growth of 15.1% over the past 3 years. IBM's most recent annual dividend is $2.90. Assume IBM will continue to increase dividends at 15.1% for the next 5 years before reducing its dividend growth to 6% for the long t..
Madeline Manufacturing Inc.'s current stock price is $35 per share. Call options for this stock exist that permit the holder to purchase one share.
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The correlation of returns between the securities is -1.0. Determine the risk (standard deviation) of a portfolio consisting of equal proportions of securities A and B.
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