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Calculatin cost of debt and preferred stock

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Cost of debt and preferred stock

1. Brandeis Mining Co. has 10-year 8% annual coupon bonds outstanding. The bonds have a current market price of 885.84 and a face value (FV) of 1,000. If Brandeis's marginal tax rate is 35%, what is its relevant after-tax component cost of debt, rd (1-T)?

6.76, 9.85, 5.60 6.40 or 5.79

2. Brandeis is considering issuing shares of preferred stock. The preferred stock would have a face value of 100 per share and pay a fixed annual dividend of 7.80 per share. The flotation cost associated with issuing this preferred stock is 6% of each share's face value. What is Brandeis' cost of preferred stock (rp)?

8.30%, 8.67%, 7,50% 7.83% or 8.00%

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Solution Summary

There are two problems. Solutions to these problems depict the methodology to calculate cost of debt and preferred stock.

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Please refer attached file for better clarity of functions in MS Excel.

Problem 1
Number of coupon payments outstanding=10
Maturity amount=face value=$1,000
Coupon amount=8%=1000*8%= $80.00
Current Price=$885.84

Let us study cash ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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