- The firm's tax rate is 40%
- The current price of HD's 12% coupon, semiannual payment, noncallable bonds wit 15 years remaining to maturity is $1,153.72. HD does not use short term interest bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost.
- The current price of the firm's 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. HD would incur flotation costs equal to 5% of the proceeds on a new issue.
- HD's common stock is currently selling at $50 per share. Its last dividend (Do) was $4.19, and the dividends are expected to grow at a constant rate of 5% in the foreseeable future. HD's beta is 1.2, the yield on T-bond is 7%, and the market risk premium is estimated to be 6%. For the bond yield plus risk premium approach, the firm uses a 4 percentage point risk premium.
- HD's target capital structure is 30% long term debt, 10% preferred stock, and 60% common equity.

1. HD estimates that if it issues new common stock, the floatation cost will be 15%. HD incorporates the floatation costs into the DCF approach. What is the estimated cost of newly issued common stock, taking into account the floatation cost?

2) Suppose HD issues 30 year debt with a par value of $1000 and a coupon rate of 10%, paid annually. If flotation costs are 2%, what is the after tax rate cost of debt for the new bond issue?

Solution Summary

The solution explains how to determine the cost of debt and cost of equity with calculations and answers in an attached Excel file.

Refer to the observed capital structures given in Table 15.3 of the text. What do you notice about the types of industries with respect to their average debt-equity ratios? Are certain types of industries more likely to be highly leveraged than others? What are some possible reasons for this observed segmentation? Do the operati

Please tell me how to find K given the parameters in the problem for #9.50. You can see how I'm trying to do it, but I can't figure out what to plug in for Cd and Ce from what's given.

How do you calculate the cost of debtandcost of equity if you are only given the beta, debt/equity proportion, and the after tax interest rate?
Please see attached for more details.
Use a spreadsheet to calculate the cost of debt, cost of equity (using CAPM), and weighted marginal cost of capital for each level of debt

A firm has a debt-to-equity ration of 1. Its (levered) cost of equity is 16% and its cost of debt is 8%. If there were no taxes, What would be its cost of equity if the debt-to-equity ratio were zero?
A company has a debt to total value ratio of 0.5 . The cost of debt is 8% and that of unlevered equity is 12%. Calculate the

A company has a debt-equity ratio of 1.5. Its WACC is 14%, and its cost of debt is 9%. There is no corporate tax.
A. What is the company's cost of equity capital?
B. What would the cost of equity be if the debt-equity ratio were 1.0? What if it were 0.5? What is it were 0?

1) A firm has a debt-to-equity ratio of .60. Its cost of debt is 8%. Its overall cost of capital is 12%. What is its cost of equity if there are no taxes or other imperfections?
2) Wild Flowers Express has a debt-equity ratio of .60. The pre-tax cost of debt is 9% while the unlevered cost of capital is 14%. What is the cost o

I need help in calcuating for Weighted average cost of capital.
The question go Suppose that George Industries has a cost of equity of 14%, no preferred stock and a cost of debt of 9%. If the target debt/equity ratio is 75% and the tax rate is 34%, what is Dugan 's weighted average cost of capital(WAAC)?

A firm has a debt-to-equity ratio of 1.20. If it had no debt, its cost of equity would be 15%. Its cost of debt is 10%. What is its cost of equity if there are no taxes or other imperfections?
a. 10%
b. 15%
c. 18%
d. 21%
e. none of the above

Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares.
a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debtcost of capital is 6%. What

First question: What is the proportion of debt financing for a firm that expects a 24% return on equity, a 16% return on assets, and a 12% return on debt? Ignore taxes.
I understand that the answer is 66.7%
I am using the WACC formula WACC = E/V * Re + D/V *Rd * (1-Tc) Where Re = Cost of equity; Rd = cost of debt; E= mark