Xhat Inc has 12,000 bonds outstanding that have a 6% coupon rate. The bonds are selling at 98% of face value, pay interest semi-annually, and mature in 28 years. There are 400,000 shares of 9% $100 preferred stock outstanding with a current market price of $83 a share. In addition, there are 1.40 million shares of common stock outstanding with a market price of $54 a share and a beta of 1.2. The common stock paid a total of $1.80 in dividends last year and expects to increase those dividends by 4% annually. The firm's marginal tax rate is 34%. The overall stock market is yielding 12% and the Treasury bill rate is 4.0%.

a. What is the cost of equity based on the dividend growth model? (2)

b. What is the cost of equity based on the security market line?(2)

c. What is the cost of financing using preferred stock? (2)

d. What is the pre-tax cost of debt financing? (2)

e. What weight should be given to equity in the weighted average cost of capital computation? (2)

f. What would be the cost of new financing (including the impact of each of 28-year bonds, preferred shares and common shares), assuming that flotation costs would be 5% of the proceeds of the issue? (12)

Required the total cost of financing, not just the cost of capital for the individual pieces.

g. If net income in the next year is expected to be $8,000,000, what would be the common equity breakpoint for new financing, assuming the current capital structure is considered optimal? (3)

Xhat Inc has 12,000 bonds outstanding that have a 6% coupon rate. The bonds are selling at 98% of face value, pay interest semi-annually, and mature in 28 years. There are 400,000 shares of 9% $100 preferred stock outstanding with a current market price of $83 a share. In addition, there are 1.40 million shares of common stock outstanding with a market price of $54 a share and a beta of 1.2. The common stock paid a total of $1.80 in dividends last year and expects to increase those dividends by 4% annually. The firm's marginal tax rate is 34%. The overall stock market is yielding 12% and the Treasury bill rate is 4.0%.

a. What is the cost of equity based on the dividend growth model? (2)

b. What is the cost of equity based on the ...

Solution Summary

Response discusses cost of equity based on the security market line

Bonds - The Memory Company has 10,000 bonds outstanding ($1000 face value). The bonds are selling at 101$ of face value, have a 7% coupon rate, pay interest annually, and mature in 9 years.
Preferred shares - There are 500,000 shares of 8% preferred stock ($100 stated value) outstanding with a current market price of $91 a s

The common stock of William Tell Computers has a beta of .80. The treasury bill rate is 4 percent and themarket risk premium is estimated at 8 percent. The company's capital structure is 30 percent debt paying a 8 percent interest rate, and 70 percent equity. The company's tax rate is 40 percent.
a. What is the company's co

Mike's Motors has 30 million shares outstanding with a price of $15 per share. In addition, Mike has issued bonds with a total current market value of $150 million. Suppose Rumolt's equitycost of capital is 10%, and its debt cost of capital is 5%.
a. What is Mike's pretax weighted average cost of capital?
Pretax weighted a

Other things held constant, if the expected inflation rate decreases and investors also become more risk averse, theSecurityMarketLine would shift in this manner:
A. Down and have a steeper slope.
B. Up and have a less steep slope.
C. Up and keep the same slope.
D. Down and keep the same slope.
E. Down and have a less

The U Co. and the L Co. are identical in all aspects except that U Co. is all-equity financed while L Co. has $1,000 debt in 6% perpetual bonds outstanding (on which $60 of interest is paid each year). Both firms have expected net operating income of $300 (forever). Both firm distribute as dividends all income available to sha

Given the information provided in the table, what is your estimate of thecost of equity for Gibson Flowers?
Risk-free rate of interest 3.5%
Average equitymarket return 10.5%
Estimated cost of debt 8.0%
Estimated correlation of Gibson with themarket 0.726
Estimated standard deviation of Gibson's returns 35%
Estimated sta

How do you calculate thecost of debt and cost of equity if you are only given the beta, debt/equity proportion, and the after tax interest rate?
Please see attached for more details.
Use a spreadsheet to calculate thecost of debt, cost of equity (using CAPM), and weighted marginal cost of capital for each level of debt

A firm has a debt-to-equity ratio of 1.20. If it had no debt, its cost of equity would be 15%. Its cost of debt is 10%. What is its cost of equity if there are no taxes or other imperfections?
a. 10%
b. 15%
c. 18%
d. 21%
e. none of the above