Common stock usually has higher potential for changes in prices (up or down) which translate in higher returns or losses. Given this fact, would you expect common stock to be higher or lower price than preferred stock all else being equal?© BrainMass Inc. brainmass.com October 25, 2018, 7:02 am ad1c9bdddf
Common stock has a greater potential for gains and losses, and common stock is typically priced lower than preferred stock. Preferred stock is priced higher because it is preferred to common ...
Would you expect common stock to be higher or lower price than preferred stock all else being equal?
Cost of debt and preferred stock
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Cost of debt and preferred stock
1. Franklin Mining has 15 yr, 8% annual coupon bond outstanding. Bond has a current market price of $885.54 and a face value of $1,000. If Franklin's marginal tax rate is 35% what is its relevant after-tax component cost of debt, rd (1-T)?
They are considering issuing shares of perpetual preferred stock. The preferred stock would have a face value of $100 per share and pay a fixed annual dividend of $7.20 per share. The floatation cost associated with issuing this preferred stock is 10% of each shares face value. What is Franklin's cost of preferred stock (rp)?
Costs of debt and prefered stock
Fletcher Publishing stock currently trades at $45.50 per share. At the end of the year, they expect to pay an annual dividend of $4.65 per share (d1=$4.65) and the dividend is expected to grow at a constant rate of 4% per year. What is the firms cost of retained earnings? (rs)
If Fletcher was to issue new common stock, the new shares could be sold at the current market price, but floatation cost would account for 10% of the proceeds. What is Fletcher's cost of new common stock (re)?
Fletcher has forecasted net income of $500 million and a capital budget of $800 million for next year. Fletcher's target capital structure consists of 65% debt and 35% equity. The firm also plans to keep its dividend payout ratio fixed at 45% what is the relevant cost of common equity to be used in calculating Fletcher's weighted average cost of capital (WACC) on the last dollar it raises?
CAPM and the optimal capital budget
2. Ballack Inc. is a 100% equity-financed company (no debt or preferred stock). Its WACC equals its costs of common equity, their retained earnings will be sufficient to fund its capital budget in the foreseeable future. Their beta of 1.6 the risk-free rate of 6.0% and the market premium is 5.0%. What is their WACC?
They are considering the following projects for next year:
Project Requires investment Expected rate of return
W $1,000 14.10%
X $2,000 13.65%
Y $3,000 14.60%
Z $4,000 13.10%
Each project has average risk, they accept any project whose expected rate of return exceed its cost of capital. How large should next years capital budget be?
Weighted average cost of capital WACC
3. Howard Industries has a target capital structure consisting of 30% debt, 10% preferred stock, and 60% common equity. The-tax YTM on Howard's long term bonds is 9.5% it cost of preferred stock is 8% and its cost of retained earnings is 12.5%. If the firm's 40% what is Howard's WACC if it doesn't have to issue new common stock?
If they undertake a variety of projects with different levels of risk. Howard adds 2 percentage points to its WACC for high-risk projects and subtracts 2 percentage points from its WACC for low-risk projects.
Which projects should Howard Industries accept check all that should be accepted?
Project Expected rate of return risk accept project
A 10.7% High
B 10.4% Average
C 12.7% High
D 8.5% Low
E 8.6% Average
F 6.7 % Low
G 9.1% Low
H 10.8% Average
Capital Structure weights
Frank Inc has the following abridge balance sheet:
Current Assets $3,600 Debt $5,200
Preferred stock $ 600
Fixed assets $6,400 Common Equity $ 4,200
Total assets $10,000 Total liabilities and equity $10,000
The market value of Franks' debt preferred stock and common equity its book value. Frank's cost of debt is 10% cost of preferred stock is 7.7% and its costs of common equity are 15%. If Frank's tax rate is 30% what is the firm's WACC?