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    Debt, Capital Structure, and Borrowing Costs

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    Cost of common stock: Seerex Wok Co. is expected to pay a dividend of $1.10 one year from today on its common shares. That dividend is expected to increase by 5 percent every year thereafter. If the price of Seerex is $13.75, then what is Seerex's cost of common equity?

    Cost of common equity = %

    Cost of common stock:Fjord Luxury Liners has preferred shares outstanding that pay an annual dividend equal to $15. If the current price of Fjord preferred shares is $181, then what is the after-tax cost of preferred shares for Fjord?

    After-tax cost of preferred shares %

    Cost of debt for a firm: You are analyzing the after-tax cost of debt for a firm. You know that the firm's 12-year maturity, 9.5 percent coupon bonds that pay interest semiannually are selling at a price of $1,200. If these bonds are the only debt outstanding for the firm, the after-tax cost of debt for this firm if the marginal tax rate for the firm is 34 percent is _____%.

    1. YTM = %

    2. After-tax cost of debt = %

    You know that the return of Momentum Cyclicals' common shares reacts to macroeconomic information 1.80 more times than the return of the market. If the risk-free rate of return is 3.80 percent and the market risk premium is 6 percent, then what is Momentum Cyclicals' cost of common equity capital?

    Cost of common equity capital = %.

    The Gearing Company has an after-tax cost of debt capital of 4 percent, a cost of preferred stock of 8 percent, a cost of equity capital of 10 percent, and a weighted average cost of capital of 7 percent. Gearing intends to maintain its current capital structure as it raises additional capital. In making its capital-budgeting decisions for the average-risk project, the relevant cost of capital is

    - 7 percent
    - 10 percent
    - 4 percent
    - 8 percent

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    Solution Preview

    Cost of common stock: Seerex Wok Co. is expected to pay a dividend of $1.10 one year from today on its common shares. That dividend is expected to increase by 5 percent every year thereafter. If the price of Seerex is $13.75, then what is Seerex's cost of common equity?

    Cost of common equity = %
    Cost of equity= Next year dividend /Price +Growth
    = 1.1/13.75 + 5%
    =13% =Answer

    Cost of common stock: Ford Luxury Liners has preferred shares outstanding that pay an annual dividend equal to $15. If the current price of Fjord preferred shares is $181, then what is the after-tax cost of ...

    Solution Summary

    Solution helps in making capital-budgeting decisions for the average-risk project, the relevant cost of capital.

    $2.19

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