What will be the after-tax cost of debt for the company

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1. Company XYZ's stock sells for $30.00; its next expected dividend is $1.55; and analysts expect its growth rate to be 4.25%. Based on the DCF method, what is the minimum rate of return that should be earned on retained earnings to justify plowing earnings back into the business rather than paying them out to shareholders as dividends?

2. Sammy is the CEO of Company XYZ. He estimates that the risk premium should be 4.5%. Company XYZ's bonds yield 9.25%. Using the bond-yield-plus-risk-premium approach, what is the firm's cost of equity?

3. Company XYZ doesn't have any preferred stock outstanding, but plans to issue some in the future and therefore has included it in its target capital structure. Company XYZ would sell this stock to a few large hedge funds, the stock would have a $3.75 dividend per share, and it would be priced at $91.75 a share. What would be Company XYZ's cost of preferred stock?

4. Assume Company XYZ can borrow at an interest rate of 6.5%, and its marginal federal-plus-state tax rate is 37%. What will be the after-tax cost of debt for the company?

Reference no: EM131863363

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