Reference no: EM132199942

Dexter Mills has 50,000 bonds outstanding that mature in 12 years, pay interest semi-annually, and have a coupon rate of 10.5%. These bonds have a face value of $1,000 and a current market price of $1,060. The company also has 500,000 shares outstanding of 6% preferred stock currently selling for $35 a share, and 5.5 million shares outstanding of common stocks currently selling for $11 a share. The common stock has a beta of 1.42, the U.S. Treasury bill is yielding 2.6% and the return on the market is 12.6%. The corporate tax rate is 35%.

1. What is the firm's after tax cost of debt?

N = 12 PV = -1060 FV = 1000 PMT = 105 Tax Rate= 35%  After Rd = =NPV

A. 4.88 percent B. 6.27 percent C. 9.65 percent D. 10.50 percent

2. What is the firm's cost of preferred equity? A. 13.12 percent B. 13.64 percent C. 17.14 percent D. 19.36 percent

3. What is the firm's cost of common equity? A. 13.12 percent B. 16.80 percent C. 20.49 percent D. 17.14 percent

4. What weight should be assigned to debt when computing the firm's weighted average cost of capital? A. 4.88 percent B. 13.36 percent C. 40.46 percent D. 46.18 percent

5. What is the firm's weighted average cost of capital? A. 11.87 percent B. 12.59 percent C. 13.95 percent D. 14.29 percent