Here is the condensed 2015 balance sheet for Skye Computer Company (in thousands of dollars): CONDENSED BALANCE SHEET FOR SKYE COMPUTER COMPANY FY2015 Current assets $2,000 Net fixed assets 3,000 Total assets $5,000 Total debt $2,100 Preferred stock 250 Common stock 1,300 Retained earnings 1,350 Total common equity $2,650 Total liabilities & equity $5,000 The firm's marginal tax rate is 35%. The firm's currently outstanding 10% annual coupon rate long-term debt sells at $1,051.11. The debt matures in 7 years. Coupon interest is paid semiannually. Skye's preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30 per share. Skye's earnings per share last year were $3.20. The common stock sells for $55.00, last year’s dividend (D0) was $2.10, and a flotation cost (i.e, f ) of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. The market risk premium is 5%, the risk-free rate is 6%, and Skye's beta is 1.516. ) Calculate the after-tax cost of debt (i.e., (1-tax rate)*rD ) , rD is Kd

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 13P

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Here is the condensed 2015 balance sheet for Skye Computer Company (in thousands of dollars):

CONDENSED BALANCE SHEET FOR SKYE COMPUTER COMPANY
		FY2015
Current assets		$2,000
Net fixed assets		3,000
Total assets		$5,000

Total debt		$2,100
Preferred stock		250
Common stock		1,300
Retained earnings		1,350
Total common equity		$2,650
Total liabilities & equity		$5,000

The firm's marginal tax rate is 35%. The firm's currently outstanding 10% annual coupon rate long-term debt sells at $1,051.11. The debt matures in 7 years. Coupon interest is paid semiannually.

Skye's preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30 per share.

Skye's earnings per share last year were $3.20. The common stock sells for $55.00, last year’s dividend (D0) was $2.10, and a flotation cost (i.e, f ) of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%.

The market risk premium is 5%, the risk-free rate is 6%, and Skye's beta is 1.516.

) Calculate the after-tax cost of debt (i.e., (1-tax rate)*rD ) , rD is Kd

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