16.1 Midwest Electric’s bonds will mature in 20 years. The coupon interest rate on the bonds is 7 percent, paid at the end of each year. The bonds have maturity values of $1,000each and are currently selling at a market price of $744.59. What is the yield of maturity? (Solve by finding the internal rate of return) If the company’s marginal tax rate is 35% what is the aftertax cost of existing debt?
YTM= [Annual interest Payment + (maturity value - market value)/n]/[(maturity value + market value)/2] |
YTM= [70 + (1000-744.59)/20]/[(1000+744.59)/2] |
YTM= .0603 = 6.03% |
kd = YTM (1-tax rate) |
kd = .0603 (1-.35) |
kd = .0391 = 3.91% |
16.2 Midewest Electric’s preferred stock has a par value of $100 a share and a marketprice of $80 a share. Dividends per year are $10. What is the cost of existing preferred stock?
kp = Dp/Pp |
kp = 10/80 |
kp = .125 = 12.5% |
16.3 In order to sell new $100 par-valuepreferred stock at a price of $100, Midwest Electric must pay a dividend that will provide a dividend yield equal to the cost of preferred stock determined in problem 2. Flotation costs would be $5 a share.What is the cost of new preferred stock?
knp = Dnp/Pnp |
knp = 12.5/95 |
knp = .1315 = 13.15% |
16.4 Midwest Electric is expected to pay a dividend of $5 per share over the next year, andthe stock is currently selling for $50 a share. If dividends are expected to grow at 5 percent a year, what is the cost of existing common stock?
ke = (Di/P)+g |
ke = (5/50)+.05 |
ke = .15 = 15%|
16.5 Flotation costs for a new issue of common stock in problem 4 would be $3 a share. What is the cost of new equity for Midwest Electric?
kne = ke/(1-f) |
kne = .15/(1-.06) |
kne =.1595 = 15.95% |
16.6 The 10 year bonds of Indiana International have a yield to maturity of 9.186 percent. The company can sell new 10 year bonds to provide this same interest rate, but flotation...