Reference no: EM132504043
Question 1: Pathos Co.'s common stock is currently selling for $23.80. Dividends paid last year were $0.70. Floatation costs on issuing stock will be 10% of market price. The dividends and earnings per share are expected to have an annual growth rate of 15%. What is the cost of internal common equity for Phatos?
Question 2: The stock for the Bestsold Corporation sells for $58. If a new issue is sold, the floatation costs are estimated to be 8%. The company pays 50% of its earnings in dividends, and a $4 dividend was recently paid. Earnings per share 5 years ago were $5. Earnings are expected to continue to grow at the same annual rate in the future as during the past 5 years. The firm marginal tax rate is 34%.
(a) What is the cost of internal common equity?
(b) What is the cost of new common equity?
Question 3: Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 14% annual coupon rate and a 10 year maturity. The investors require a 9% rate of return.
(a) Compute the market value of the bonds.
(b) What will the net price be if floatation costs are 10.5% of the market price?
(c) What is the firm's after tax-cost of debt if the corporate tax rate is 34%?
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