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# Cost of retained earnings and debt

QUESTIONS:

* A corporation is planning an expansion project that it desires to finance with newly issued preferred stock. The firm has an outstanding issue of preferred stock that pays a dividend of \$4.25 per share, which is trading for \$65 a share. The investment bankers have advised Seven Eleven that flatation costs will be 8% per share. What will be the cost of the newly issued preferred shares?

*A corporation is undertaking a capital budgeting analysis. The firm's beta is 1.5. The rate on 30-year U.S. Treasury bonds is 5%, and the return on the S & P 500 index is 12 %. What is the cost of Pony's retained earnings?

* A corporation just paid a dividend of \$1.85. This dividend is expected to grow at a constant annual ratae of 3% per year. Roto Roofing's common stock is currently selling for \$12.50. The firm can sell new stock at this price subject to floatation costs of 15%. The firm's marginal tax rate is 40%. What will the cost of the newly issured stock be?

* A corporation has \$2,575,000 of debt, \$550,000 of preferred stock, and \$18,125,000 of common equity. Metals Corp.'s after-tax cost of debt is 5.25%, preferred stock has a cost of 6.35%, and newly issued common stock has a cost of 14.05%. What is Metals Copr's weighted average cost of capital?

* A corporation is is planning a \$50 million expansion. The expansion is to be financed by selling \$20 million in new debt and \$30 million in new common stock. The before-tax required rate of return on debt is 9%, and the required rate of return on equilty is 13.75%. If the company is in the 40% tax bracked, what is New York Key's weighted marginal cost of capital?

* The last paid dividend is \$2 for a share of common stock that is currently selling for \$20. What is the cost of retained earnings if the long-term growth rate in dividends for the firm is expected to be 8%?

* A corporation has \$5 million of new debt to finance a project with a coupon rate of 12%, paid semiannually and has a par value of \$1,000. The bonds will mature in 14 years and are priced at \$850, net of flotation costs. If the firm's tax rate is 40%, what is the the cost of debt to J & B (Round to the nearest whole percentage.)

Thanks for your assistance. I have been unable to calculate the correct answers and am requesting help with the solutions in order to determine my problem.

#### Solution Preview

QUESTIONS:

* A corporation is planning an expansion project that it desires to finance with newly issued preferred stock. The firm has an outstanding issue of preferred stock that pays a dividend of \$4.25 per share, which is trading for \$65 a share. The investment bankers have advised Seven Eleven that flatation costs will be 8% per share. What will be the cost of the newly issued preferred shares?

*A corporation is undertaking a capital budgeting analysis. The firm's beta is 1.5. The rate on 30-year U.S. Treasury bonds is 5%, and the return on the S & P 500 index is 12 %. What is ...

#### Solution Summary

This provides the steps to calculate the Cost of retained earnings and debt

\$2.19