Question

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 priced at $70 and pay a dividend of $5.50. The flotation cost on the preferred stock is $3. Hint Print a. Compute the aftertax cost of debt. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) References Aftertax cost of debt b. Compute the aftertax cost of preferred stock. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Aftertax cost of preferred stock

Answer 1

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ke - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut General $ 4:0 .00 :.: Insert Delete Format % % , Number Conditional Format Formatting as Table Styles Cell Styles AutoSum - A Fill Sort & 2 Clear Filter Editing Find & Select Cells Calibri 11 A A = = = V Wrap Text E Copy Paste BIU - D A SF Merge Format Painter Merge & Center - Center Clipboard Font Alignment OE2 for ДОА ОВос OD TОЕ TREASURER 3 COST OF DEBT TAX AFTER TAX COST OF DEBT OF 06 он o o Окт 2 4 8.50% 25% 6.38% [8.50%*(1-0.25)] COST OF PREFERRED STOCK PRICE (PO) DIVIDEND (D) FLOTATION COST (f) 70 5.5 COST OF PREFERRED STOCK 8.21% [5.5/(70-3)] PREFERRED STOCKS ARE NOT TAX DEDUCTIBLE SO BEFORE TAX AND AFTER TAX, BOTH COSTS WILL BE SAME AFTER TAX COST OF PREFERRED STOCK 8.21% DIFFEFRENCE BETWEEN TWO COSTS 1.83% [8.21%-6.38%] NO, TREASURER IS INCORRECT THE DIFFERENCE IS LESS THAN 2% 21 22 K M convexity DGM beta port future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio KE CAPM UTILITY, SHARPE, beta ferences: CF135 cap stru WACC BOU 120% RESI el -_- Rea DO 4 * 410 ENG 30-10-2019