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Calculate the cost fo the preferred shares

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Reference no: EM13204182

Question 1:

Cost of debt.  For each of the following bonds, calculate the after-tax cost of debt.  Assume the coupons are paid semiannually, that the tax rate is 40%, and that we are dealing with $1,000 of par value.

Bond

Life

Underwriting fee

Discount (-) or Premium (+)

Coupon rate

A

20 years

$20

-$5

9%

B

16

4% of par

+10

10.4

C

15

3% of par

-15

6.8

D

25

$15

None

9.3

E

22

2% of par

-20

5.9

Question 2:

Cost of preferred equity.  Taylor systems has just issued preferred shares.  The shares have a 12 percent annual dividend and a $100 stated value and were sold at $97.50 per share.  In addition, flotation costs of $2.50 per share must be paid.

a. Calculate the cost fo the preferred shares.  What is the after-tax cost of the preferred shares?

b. If the firm sells the preferred stock with a 10 percent annual dividend and nets $90 after flotation costs, what is its cost?

Reference no: EM13204182

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