Calculate the cost of common stock and preferred stock

Assignment Help Financial Management
Reference no: EM131510772

Domelan Van Lines is interested in measuring its cost of capital. They are in a 40% tax bracket and here’s their data: Debt. The firm can raise debt by selling $1,000 par value, 8% coupon interest rate, 20-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $30 per bond would have to be given. The firm also must pay flotation costs of $30 per bond. Preferred Stock. The firm can sell 8% preferred stock at its $95 per share par value. The cost of issuing and selling the preferred stock is expected to be $5 per share. Common Stock. The firm’s common stock is currently selling for $90 per share. The firm expects to pay cash dividends of $7 per share next year. The firm’s dividends have been growing at an annual rate of 6%, and this growth is expected to continue into the future. The stock must be underpriced by $7 per share, and flotation costs are expected to amount to $5 per share. The firm does not expect to utilize retained earnings for new projects.

a. Calculate the after tax cost of debt

b. Calculated the cost of preferred stock.

c. Calculate the cost of common stock

d. Calculate the weighted average cost of capital for Wagner Engineering, assuming that the weights are 30% for long-term debt, 20% for preferred stock, and 50% for common stock.

Reference no: EM131510772

Questions Cloud

What is the cash flow for at year : BMI corporation is evaluating relevant cash flows for a new machine. What is the cash flow for at year 0,1,2,3?
Calculate the optimal replacement cycle for the machine : The residua value can be ignored. The cost of capital of the company is 11% per year. calculate the optimal replacement cycle for the machine.
Describe the static trade-off theory : Describe the Static Trade-Off Theory that resulted from a synthesis of the work of M&M and their critics,
What is rate of return on this investment : By buying this annuity, your agent promises that you will receive payments of $1,225 month for the next 30 years. What is the rate of return on this investment?
Calculate the cost of common stock and preferred stock : Domelan Van Lines is interested in measuring its cost of capital. Calculated the cost of preferred stock. Calculate the cost of common stock.
Decrease across the board on all equity securities : Bob is an optomist and he expects the required rate of return to decrease across the board on all equity securities (stocks),
Forecasts that inflation is going to increase : Inflation was 2% last year. Thomas forecasts that inflation is going to increase to 4% this year.
The bonds have more interest rate risk : At issue these bonds were rated BBB, but today they are rated AAA. The bonds have more interest rate risk than when they were issued.
Related to the term structure of interest rates : Which one of the following risk-premiums, by definition, is not related to the term structure of interest rates (i.e. shape of the yield curve)?

Reviews

Write a Review

 

Financial Management Questions & Answers

  Calculate net capital gain or loss using schedule

Charu Khanna received a Form 1099-B showing the following stock transactions and basis during 2015: Calculate Charu’s net capital gain or loss using Schedule D and Form 8949.

  What are dividends per share

That Wich Corp. had additions to retained earnings for the year just ended of $397373. The firm paid out $191215 in cash dividends, and it has ending total equity of $4772974. The company currently has 150,000 shares of common stock outstanding. What..

  Savings account with discount rate per year

Danielle deposits $12,000 in a savings account with a discount rate of 10% per year. After 15 years, Danielle moves the money to an account that accumulates at a force of interest of 8%. At that same time, Danielle begins withdrawing money continuous..

  Method for estimating a venture''s value

Evaluate venture's present value, cash and surplus cash and basic venture capital.

  The bonds were sold at par value

A company sold a $1 million issue of bonds with a 15 year life, paying 4 percent interest per year. The bonds were sold at par value. If the company paid a selling fee $50,000 and has an annual expense of $70,256 for mailing and record keeping, what ..

  What is rawlings total return on the bond

One year later, the market's required return on this bond has increased from 6 percent to 7 percent. What is Rawlings total return on the bond?

  Correctly orders the process of daily settlement

Which of the following correctly orders the process of daily settlement? clearinghouse officials establish a settlement price; each account is marked to market; accounts of those holding long/short positions are credited/debited appropriately;

  Risk-averse investors reject investments that are fair games

Risk-averse investors reject investments that are fair games. Risk-neutral investors judge risky investments only by the expected returns. Risk-averse investors judge investments only by their riskiness. Risk-loving investors will not engage in fair ..

  Methods involve contracting out for services

Capital Healthplans Inc. is evaluating two different methods for providing home health services to its members. Both methods involve contracting out for services, and the health outcomes and revenues are not affected by the method chosen. What is eac..

  What would the risk-free rate have to be for two stocks

Stock Y has a beta of 1.35 and an expected return of 14.1 percent. Stock Z has a beta of .80 and an expected return of 11.0 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?

  Its assets must grow at the same rate as projected sales

Broussard Skateboard's sales are expected to increase by 25% from $8.8 million in 2016 to $11.00 million in 2017. Its assets totalled $4 million at the end of 2016. Baxter is already at full capacity, so its assets must grow at the same rate as proje..

  Business plan and management team of new start-up venture

The terms below all refer to interest rate, in one context or another. Which is the correct term for the following situation: an investor studies the financial statements, business plan and management team of a new start-up venture, as well as studyi..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd