Punjab College of Commerce, Gujranwala

ADP-D4
Finance for Computer Sciences
Assignment 1
1. Apple Corporation plans a new issue of bonds with a par value of $1,000, a maturity of 28
years, and an annual coupon rate of 16.0%. The yield to maturity on firm’s bonds is 14%. The
firm's marginal tax rate is 30%. What will be the firm's true cost of debt?
2. Costly Corporation is also considering using a new preferred stock issue. The preferred
would have a par value of $400 with an annual dividend equal to 18.0% of par. The company
believes that the market value of the stock would be $968.00 per share with flotation costs of
$68.00 per share. The firm's marginal tax rate is 40%. What would the firm's cost of preferred
be for this new preferred stock issue?
3. Unilever Corporation is considering using equity financing. Currently, the firm's stock is
selling for $47.00 per share. The firm's dividend for next year is expected to be $3.40 with an
annual growth rate of 5.0% thereafter indefinitely. If the firm issues new stock, the flotation
costs would equal 14.0% of the stock's market value. The firm's marginal tax rate is 40%.
What is the firm's cost of internal equity?
4. ABC Corporation is considering using equity financing. Currently, the firm's stock is selling
for $31.00 per share. The firm's dividend for next year is expected to be $5.50 with an annual
growth rate of 5.0% thereafter indefinitely. If the firm issues new stock, the flotation costs
would equal 15.0% of the stock's market value. The firm's marginal tax rate is 40%. What is
the firm's cost of external equity?
5. Laurel, Inc. has debt outstanding with a coupon rate of 6% and a yield to maturity of 7%. Its tax
rate is 35%. What is Laurel’s effective (after-tax) cost of debt?
6. Dewyco has preferred stock trading at $50 per share. The next preferred dividend of $4 is due in
one year. What is Dewyco’s cost of capital for preferred stock?
7. CoffeeCarts has a cost of equity of 15%, has an effective cost of debt of 4%, and is financed 70%
with equity and 30% with debt. What is this firm’s WACC?
8. Pfd Company has debt with a yield to maturity of 7%, a cost of equity of 13%, and a cost of
preferred stock of 9%. The market values of its debt, preferred stock, and equity are $10 million,
$3 million and $15 million, respectively, and its tax rate is 40%. What is this firm’s WACC?
9. Growth Company’s current share price is $20 and it is expected to pay a $1 dividend per share
next year. After that, the firm’s dividends are expected to grow at a rate of 4% per year.
a. What is an estimate of Growth Company’s cost of equity?
b. Growth Company also has preferred stock outstanding that pays a $2 per share fixed dividend. If this
stock is currently priced at $28, what is Growth Company’s cost of preferred stock?
c. Growth Company has existing debt issued 3 years ago with a coupon rate of 6%. The yield to maturity
on firm’s bonds is 12%. What is Growth Company’s cost of debt if tax rate is 40%?
d. What is WACC of the company if Capital structure consists of 35% debt, 55% common stock and 10%
proffered stock? Use the data calculated in part a, b and c for this purpose.