1. Barry Bank issued a 25-year, 3 percent semiannual bond seven years ago. The bond currently sells for 107 percent of its face value. The company’s tax rate is 21 percent.
  1. What is the pretax cost of debt?
  2. What is the after-tax cost of debt?
  3. Which is more relevant, the pretax or the after-tax cost of debt? Why?

  1. The Chole Corporation’s common stock has a beta of .91. If the risk-free rate is 2.5 percent and the market risk premium is 6.75 percent, what is the company’s cost of equity capital?
  1. Freddy’s Farm has an issue of preferred stock with a stated dividend of $3.82 that just sold for $94 per share. What is the bank’s cost of preferred stock?

  1. Mahomes Manufacturing needs to raise $100 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 40 percent common stock, 5 percent preferred stock, and 55 percent debt. Flotation costs for issuing new common stock are 6 percent, for new preferred stock, 4 percent, and for new debt, 3 percent. What is the true initial cost figure the company should use when evaluating its project?
  1. Given the following information for Watson Power Co., find the WACC. Assume the company’s tax rate is 21 percent. Debt: 20,000 bonds with a 6.8 percent coupon outstanding, $1,000 par value, 20 years to maturity, selling for 95 percent of par; the bonds make semiannual payments.

Common stock: 1,025,000 shares outstanding, selling for $54 per share; the beta is 1.20.

Preferred 45,000 shares of 2.8 percent preferred stock outstanding, currently stock: selling for $60 per share. Assume par value is $90.

Market: 9 percent market risk premium and 2.2 percent risk-free rate.


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