Question

# The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities...

The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock.

Debt can be issued at a yield of 10.4 percent, and the corporate tax rate is 25 percent. Preferred stock will be priced at \$61 and pay a dividend of \$5.20. The flotation cost on the preferred stock is \$7.

a. Compute the aftertax cost of debt. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

b. Compute the aftertax cost of preferred stock. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

c. Based on the facts given above, is the treasurer correct?

 Yes, the treasurer is correct. No, the treasurer is incorrect.

a)

After tax cost of debt = YTM (1 - tax)

After tax cost of debt = 0.104 (1 - 0.25)

After tax cost of debt = 0.078 or 7.80%

b)

After tax cost of preferred stock = [D1 / (share price - flotation cost)] * 100

After tax cost of preferred stock = [5.2 / (61 - 7)] * 100

After tax cost of preferred stock = 9.63%

c)

Different = 9.63% - 7.8% = 1.83

No, the treasurer is incorrect

#### Earn Coins

Coins can be redeemed for fabulous gifts.

Similar Homework Help Questions
• ### The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities...

The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock. Debt can be issued at a yield of 10.4 percent, and the corporate tax rate is 25 percent. Preferred stock will be priced at \$61 and pay a dividend of \$5.20. The flotation cost on the preferred stock...

• ### The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities...

The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 3 percent less than that for preferred stock. Debt can be issued at a yield of 9.0 percent, and the corporate tax rate is 35 percent. Preferred stock will be priced at \$56 and pay a dividend of \$4.40. The flotation cost on the preferred stock...

• ### The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities...

The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock. Debt can be issued at a yield of 14.6 percent, and the corporate tax rate is 30 percent. Preferred stock will be priced at \$53 and pay a dividend of \$6.00. The flotation cost on the preferred stock...

• ### The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities...

The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 6 percent less than that for preferred stock. Debt can be issued at a yield of 13.0 percent, and the corporate tax rate is 30 percent. Preferred stock will be priced at \$64 and pay a dividend of \$8.40. The flotation cost on the preferred stock...

• ### The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities...

The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 3 percent less than that for preferred stock. Debt can be issued at a yield of 11.6 percent, and the corporate tax rate is 40 percent. Preferred stock will be priced at \$76 and pay a dividend of \$7.00. The flotation cost on the preferred stock...

• ### 18 The treasurer of Riley Coal Co. is asked to compute the cost of fixed income...

18 The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 4 percent less than that for preferred stock. Debt can be issued at a yield of 12.0 percent, and the corporate tax rate is 25 percent. Preferred stock will be priced at \$62 and pay a dividend of \$7.40. The flotation cost on the preferred...

• ### The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities...

The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 1 percent less than that for preferred stock. Debt can be issued at a yield of 14.4 percent, and the corporate tax rate is 35 percent. Preferred stock will be priced at \$69 and pay a dividend of \$6.50. The flotation cost on the preferred stock...

• ### Problem 11-15 Comparison of the costs of debt and preferred stock (LO11- 3) 1.7 points The treasurer of Riley Coal Co....

Problem 11-15 Comparison of the costs of debt and preferred stock (LO11- 3) 1.7 points The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock. eBook Debt can be issued at a yield of 8.5 percent, and the corporate tax rate is 25 percent. Preferred stock will be...

• ### Bargeron Corporation has a target capital structure of 61 percent common stock, 6 percent preferred stock,...

Bargeron Corporation has a target capital structure of 61 percent common stock, 6 percent preferred stock, and 33 percent debt. Its cost of equity is 14.1 percent, the cost of preferred stock is 7.1 percent, and the pretax cost of debt is 8.8 percent. The relevant tax rate is 34 percent. a. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)    WACC             % b....

• ### Targaryen Corporation has a target capital structure of 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Its cost of equity is 11 percent, the cost of preferred stock is 5 per...

Targaryen Corporation has a target capital structure of 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Its cost of equity is 11 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 23 percent. a. What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the...