9-11. (Individual or component costs of capital)sources of financing for Doosan Babcock:a. A $1,000 par value bond with a market price of $985 and a coupon interestrate of 12 percent. Flotation costs for a new issue would be approximately6 percent of market price. The bonds mature in 12 years, and the marginalcorporate tax rate is 17 percent.b. A preferred stock selling for $110 with an annual dividend payment of $9.The flotation cost will be $8 per share. The company's marginal tax rate is17 percent.c. Retained earnings totaling $5.2 million. The price of the common stock is $85per share, and dividend per share was $10.70 last year. The dividend is notexpected to change in the future.d. New common stock for which the most recent dividend was $3.40. Thecompany's dividends per share should continue to increase at a 9 percentgrowth rate into the indefinite future. The market price of the stock is currently$56; however, flotation costs of $5 per share are expected if the new stock bissued.

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Answered: 9-11. (Individual or component sources…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 14P

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HMK Enterprises would like to raise $10.0 million to invest in capital expenditures. The company plans to issue five-year bonds with a face value of $1,000 and a coupon rate of 6.59% (annual payments). The following table summarizes the yield to maturity for five-year (annual-payment) coupon corporate bonds of various ratings: Rating AAA AA A BBB BB YTM 6.19% 6.36% 6.59% 6.96% 7.54% a. Assuming the bonds will be rated AA, what will be the price of the bonds? b. How much of the total principal amount of these bonds must HMK issue to raise $10.0 million today, assuming the bonds are AA rated? (Because HMK cannot issue a fraction of a bond, assume that all fractions are rounded to the nearest whole number.) c. What must be the rating of the bonds for them to sell at par? d. Suppose that when the bonds are issued, the price of each bond is $961.60. What is the likely rating of the bonds? Are they junk bonds?
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