# Calculate the Cost & Debt

2. Husky Enterprises recently sold an issue of 10-year maturity bonds. The bonds were sold at a deep discount price of $615 each. After flotation costs, Husky received $604.50 each. The bonds have a $1,000 maturity value and pay $50 interest at the end of each year. Compute the after-tax cost of debt for these bonds if Husky's marginal tax rate is 40 percent.

3. Calculate the after-tax cost of preferred stock for Bozeman-Western Airlines, Inc., which is planning to sell $10 million of $6.50 cumulative preferred stock to the public at a price of $50 a share. Issuance costs are estimated to be $2 a share. The company has a marginal tax rate of 40 percent.

4. St. Joe Trucking has sold an issue of $6 cumulative preferred stock to the public at a price of $60 per share. After issuance costs, St. Joe netted $57 per share. The company has a marginal tax rate of 40 percent.

a. Calculate the aft er-tax cost of this preferred stock offering assuming that this stock is a perpetuity.

If the stock is callable in five years at $66 per share and investors expect it to be called at that time, what is the after-tax cost of this preferred stock offering? (Compute to the nearest whole percent.)

5. The stock of Alpha Tool sells for $10.25 per share. Its current dividend rate, D0, is $1 per share. Analysts and investors expect Alpha to increase its dividends at a 10 percent rate for each of the next two years. This annual dividend growth rate is expected to decline to 8 percent for years 3 and 4 and then to settle down to 4 percent per year forever. Calculate the cost of internal equity for Alpha Tool.

6. The Hartley Hotel Corporation is planning a major expansion. Hartley is financed 100 percent with equity and intends to maintain this capital structure after the expansion. Hartley's beta is 0.9. The expected market return is 16 percent and the risk-free rate is 10 percent. If the expansion is expected to produce an internal rate of return of 17 percent,

should Hartley make the investment?

#### Solution Summary

This solution is comprised of a detailed explanation to compute the after-tax cost of debt for these bonds if Husky's marginal tax rate is 40 percent and various other questions.