PYC Limited is a manufacturing company and it has a capital structure of 65% debt and 35% equity. The firm’s 15 year, 18% annual bonds sell for R 1,150 each while its common stock currently sells for R 45 per share. The firm recently paid a dividend of R 10 per share on its common stock and the dividend is expected to grow indefinitely at a constant rate of 2% per annum. Assuming the firm’s tax rate is 40%; a) What is the firm’s after-tax cost of debt? b) What is the firm’s cost of common stock? c) Calculate the firm’s weighted average cost of capital ?

PYC Limited is a manufacturing company and it has a capital structure of 65% debt and 35% equity. The firm’s 15 year, 18% annual bonds sell for R 1,150 each while its common stock currently sells for R 45 per share. The firm recently paid a dividend of R 10 per share on its common stock and the dividend is expected to grow indefinitely at a constant rate of 2% per annum. Assuming the firm’s tax rate is 40%; a) What is the firm’s after-tax cost of debt? b) What is the firm’s cost of common stock? c) Calculate the firm’s weighted average cost of capital ?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter2: The Domestic And International Financial Marketplace

Section2.A: Taxes

Problem 6P

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