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Introduction to Cost of Capital

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COST CAPITAL
1) Cost of debt using both method currently, Knott and company can sell 15 year, $1000
par-value bonds paying annual interest at a 12% coupon rate. As result of current
interest rates, the bonds can be sold for $1010 each; flotation cost of $30 per bond will be
incurred in this process. The firm is in the 40% tax bracket.
a. Find the net proceeds from sale of the bond , N
d
.
d. Use the approximation formula to estimate the before-tax and after-tax cost of debt.

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2) Cost of preferred stock Tremain Systems has just issued preferred stock. The stock has a
12% annual divided and a $100 par value and was sold at $97.50 per share. In addition,
flotation costs of $2.50 per share must be paid.
a. Calculate the cost of the preferred stock.
b. If the firm sells the preferred stock with a 10% annual divided and nets $90.00 after
flotation cost, what is its cost?

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COST CAPITAL 1) Cost of debt using both method currently, Knott and company can sell 15 year, $1000 par-value bonds paying annual interest at a 12% coupon rate. As result of current interest rates, the bonds can be sold for $1010 each; flotation cost of $30 per bond will be incurred in this process. The firm is in the 40% tax bracket. a. Find the net proceeds from sale of the bond , Nd. d. Use the approximation formula to estimate the before-tax and after-tax cost of debt. 2) Cost of preferred stock Tremain Systems has just issued preferred stock. The stock has a 12% annual divided and a $100 par value and was sold at $97.50 per share. In addition, flotation costs of $2.50 per share must be paid. a. Calculate the cost of the preferred stock. b. If the firm sells the preferred stock with a 10% annual divided and nets $90.00 after flotation cost, what is its cost? 3) Cost of common stock equity – CAPM, AMJ Corporation common stock has a beta, b, of 1.2. The risk-free rate is 6% and the market return is 11%. a. Determine the risk premium on AMJ common stock. b. Determine the required return that AMJ common stock should provide. c. Determine AMJ’s cost of common stock equity using the CAPM. 4) Cost of common stock equity Delish Meat Packing wishes to measure its cost of common stock equity. The firm’s stock is currently selling for $57.50. The firm expects to pay a $3.40 dividend at the end of the year (20 ...
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