Q1. Current cost of a bond: You are analysing the cost of debt for a company.

You know that the

companys 14-year maturity, 9.65 percent coupon bonds are selling at a price of $953.78. The
bonds pay interest semiannually. If these bonds are the only debt outstanding for the company,
what is the after-tax cost of debt for this company if the company is in the 30 percent marginal tax
rate?
1. The current YTM for the bonds = 0.1028
The current YTM for the bonds can be calculated as follows.

$953.78 = $48.25 x PVIFA(28, YTM/2) + $1,000 x PVIF(28, YTM/2)

Solving, we find that YTM = 0.1028 = 10.28%

2. After-tax cost of debt
After-tax cost of debt is equal to: 0.0720

0.1028x (1 0.3) = 0.0720, or 7.20%

Q2.Cost of ordinary shares: Two-Stage Rockets ordinary shares just paid an annual dividend
equal of $1.15 and it is commonly known that the company expects dividends paid to increase
by 9.20 percent for the next two years and by 2 percent thereafter. If the current price of Two-
Stages ordinary shares is $13.22, then what is the cost of equity capital for the company?
Cost of equity = 12.11%

Using a spreadsheet to solve for the value of kcs, we find that the cost of equity capital
is 12.11 percent.

Q3. Cost of preference shares: Fjord Luxury Liners has preference shares outstanding that pay
an annual dividend equal to $10. If the current price of Fjord preference shares is $95, then what
is the after-tax cost of preference shares for Fjord?
After-tax cost of preference shares 10.53%

Q4. Cost of preference shares: Kresler Autos has preference shares outstanding that pay annual
dividends of $14 and the current price of the shares is $112. What is the after-tax cost of new
preference shares for Kresler if the flotation (issuance) costs for a new issue of preference shares
are 5 percent? After-tax cost of preference shares 0.1316

Kresler will only receive 95 percent of the proceeds, so we know that we can use the equation to
solve for the cost of preference shares by adjusting the denominator for the reduced proceeds
from the sale of new equity. We then have:

Q5. WACC for a company: Capital Ltd has a capital structure that is financed, based on current
market values, with 41 percent debt, 4 percent preference shares, and 55 percent ordinary shares.
If the return offered to the investors for each of those sources is 12 percent, 13 percent,
and 16 percent for debt, preference shares, and ordinary shares, respectively, then what is
Capitals after-tax WACC? Assume that the companys marginal tax rate is 40 percent.
After-tax WACC = 0.1227
WACC = x debt k debt (1-t) + xps kps + xcs kcs =

WACC = 0.41 x 0.12 x (1-0.4) + 0.04 x 0.13 + 0.55 x 0.16 = 0.1227 or, 12.27%

Q6. RetRyder Hand Trucks has a preference share issue outstanding that pays an annual
dividend of $1.30 per year. The current cost of preference shares for RetRyder is 8.90 percent.
If RetRyder issues additional preference shares that pay exactly the same dividend and the
investment banker retains 7.60 percent of the sale price proceeds, what is the cost of new
preference shares for RetRyder?
1. Current price of preference shares = $ 14.61
The current cost of preference shares for RetRyder is

Pps = (D / Kps)

= ($1.30 / 0.0890)

= $14.61
2. Cost of new preference shares for RetRyder =9.63%
RetRyder would receive 92.40 percent of the proceeds. We could then adapt the cost of
preference shares to the following:

kps = [D / Pps (1-F)]

= [$1.30 / ($14.61(1-0.0760)]

= $1.30 / $13.50

= 0.0963, or 9.63%

Q7. Current cost of a bond: You know that the after-tax cost of debt capital for Bubbles
Champagne is 6.6 percent. If the company has only one issue of five-year maturity bonds
outstanding, what is the current price of the bonds if the coupon rate on those bonds
is 9.43 percent? Assume the bonds make semiannual coupon payments and the marginal
tax rate is 30 percent.
1. Pre-tax cost of debt capital = 9.43%
We know the after-tax cost of debt, and from that we can find the pre-tax cost of debt by
multiplying by 1 minus the tax rate. This becomes 0.066 / (1 0.3) = 0.0943 = 9.43%.
2. Current price of the bonds = $ 1000
Since the YTM on the bonds is equal to the coupon rate, then we know the bonds are
priced at par, or $1,000.
Q8. Finance balance sheet: KneeMan Markup Ltd has total debt obligations with a book
and market value equal to $32 million and $35 million, respectively. It also has total
equity with a book and market value equal to $34 million and $67 million, respectively. If
you were going to buy all of the assets of KneeMan Markup today, how much should you
be willing to pay? $102 million

The price you should be willing to pay for all of the assets of the company is the market
value of those assets. Using the market price version of the balance sheet identity, we can
add the market price of the debt obligations and the equity to find the market price of the
assets. That is, $35 million + $67 million = $102 million.

Q9. Cost of ordinary shares: Whitewall Tyre Ltd just paid a $1.30 dividend on its
ordinary shares. If Whitewall is expected to increase its annual dividend by 2.60 percent
per year into the foreseeable future and the current price of Whitewalls ordinary shares is
$22.00, then what is the cost of equity for Whitewall?
Cost of equity = 8.66%
The cost of equity for Whitewall can be found using the constant-growth assumption
equation:
Solving for kcs, we find it is equal to 0.0866or 8.66 percent.

Q10.Cost of ordinary shares: Underestimated Ltds ordinary shares currently sell for
$38 per share. The company believes that its shares should really sell for $52 per share.
If the company just paid an annual dividend of $2.00 per share and the company expects
those dividends to increase by 6 percent per year forever (and this is common knowledge
to the market), then the current cost of equity for the company is ______% although the
company believes a more appropriate cost of equity for the company is ______%.
1. The current cost of equity for the company = 11.58%
The current cost of equity for the company is

kcs = (D1 / Pcs) + g

= [($2.00 x 1.06) / $38] + 0.06

= 0.1158, or 11.58%.

2. Cost of equity (as per company's belief) = 10.08%

The company believes that its cost of capital is more appropriately

kcs = (D1 / Pcs) + g

= [($2.00 x 1.06) / $52] + 0.06

= 0.1008, or 10.08%.