Question

1. bezos inc can sell 15 year $1000 par value bonds paying annual interest at 10% coupon rate. as a result of current interest rates, the bonds can be sold for $1010 each; flotation costs of $30 per bond will be incurred in this process. the firm is in the 40% tax bracket. calculate the after tax cost of debt for benzo

2. widget systems issued preferfed stock. the sto k has a 11% annual dividend ans a $100 par value and was sold at $97.50 per share. in addition, widget systems paid flotation costs of $3/share. calculate the cost of the preferred stock. widget id in the 40% tax bracket.

3. Garrett inc WACC is 10%. Garrett inc is considering a project that will cost the company $1M. the project will provide after-tax cash flows for the next 5 years as follows:

Y1: $0

Y2: $400,000

Y3: $500,000

Y4: $300,000

Y5: $200,000

what is the NPV project?

Answer 1

a	Bond face value	$1,000
b	Annual interest rate	10%
c	Sale price	$1,010
d	Flotation cost	$30
e	Actual receipt of bond (c-d)	$980
f	Interest amount (b*a)	$100
g	Tax rate	40%
h	Cost of debt (f/e)(1-g/100)*100	6.12%
2
a	Rate of preference stock	11%
b	Face vale	$100
c	Sale value	$98
d	Flotation cost	$3
e	Actual receipt of bond (c-d)	$95
f	Dividend amount (b*a)	$11
g	Cost of preference share (f/e)*100	11.6%
In fact, the preference dividend is a distribution of profits of the business. Because dividends are paid out of profits after taxes, the question of after tax or before tax cost of preference shares does not arise as in case of cost of debentures.
3	Year	Cashflow	Discount factor (1/1+r)^n r=10%, n= year for year 1 it is (1/1+0.1)	Net present value (cashflow*discount factor
	1	$0	$0.91	$0
	2	$400,000	$0.83	$330,579
	3	$500,000	$0.75	$375,657
	4	$300,000	$0.68	$204,904
	5	$200,000	$0.62	$124,184
			Total Inflow	$1,035,324
			Total Outflow	1000000
			NPV	$35,324