Asbury Corp. issued 30-year bonds 11 years ago with a coupon rate of 9.5%. Those bonds are now selling to yield 7%. The firm also issued some 20-year bonds two years ago with an 8% coupon rate. The two bond issues are rated equally by Standard and Poors and Moody’s. Asbury’s marginal tax rate is 38%.
a. What is Asbury’s after-tax cost of debt?
b. What is the current selling price of the 20-year bonds?
11. The Dentite Corporation’s bonds are currently selling to yield new buyers a 12% return on their investment. Dentite’s marginal tax rate including both federal and state taxes is 38%.
What is the firm’s cost of debt?
12. Kleig Inc.’s bonds are selling to yield 9%. The firm plans to sell new bonds to the general public and will therefore incur flotation costs of 6%. The company’s marginal tax rate is 42%.
a. What is Kleig’s cost of debt with respect to the new bonds? (Hint: Adjust the cost of debt formula to include flotation costs.)
b. Suppose Kleig also borrows directly from a bank at 12%.
1. What is its cost of debt with respect to such bank loans? (Hint: Would bank loans be subject to flotation costs?)
2. If total borrowing is 60% through bonds and 40% from the bank, what is Kleig’s overall cost of debt? (Hint: Think weighted average.)
Cost of Preferred Stock: Example 13-4 (page 568)
13. Harris Inc.’s preferred stock was issued five years ago to yield 9%. Investors buying those shares on the secondary market today are getting a 14% return. Harris generally pays flotation costs of 12% on new securities issues. What is Harris’s cost of preferred financing?
14. Fuller, Inc. issued $100, 8% preferred stock five years ago. It is currently selling for $84.50. Assuming Fuller has to pay floatation costs of 10%, what is Fuller’s cost of preferred stock?
15. A few years ago Hendersen Corp issued preferred stock paying 8% of its par value of $50. The issue is currently selling for $38. Preferred stock flotation costs are 15% of the proceeds of the sale. What is Hendersen’s cost of preferred stock?
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