Cost of Preferred Stock

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?

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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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