The SeaFair Hotel is considering adding a new addition to the hotel in the near future. The cost of adding this is projected to be $10,000,000. The board of directors has determined that their current capital structure is the optimum, consisting of 40% common equity ( 20 % internal, 20% external), 20% preferred stock and 40% debt. SeaFair Hotel has $2,000,000 in retained earnings to help finance this project. Additional information regarding this project is as follows: SeaFair Hotel's bonds have a face value of $1,000 and offer a 6% coupon rate, maturing in 15 years. The issuance cost per bond is $91.13 each Preferred stock is selling at $30 per share with a $3 per share issuance cost. The preferred stock offers a $5 per share annual dividend. Common stock is selling at $35 per share and has an issuance cost of $5 per share. The dividend for next will be $4 and will grow at 3% annually thereafter. SeaFair Hotel marginal tax rate is 40%. The owners of SeaFair Hotel expects to earn at least a 15% return from this investment. Question What is the before tax cost of debt ? (percentage)
The SeaFair Hotel is considering adding a new addition to the hotel in the near future. The cost of adding this is projected to be $10,000,000. The board of directors has determined that their current capital structure is the optimum, consisting of 40% common equity ( 20 % internal, 20% external), 20%
SeaFair Hotel's bonds have a face value of $1,000 and offer a 6% coupon rate, maturing in 15 years. The issuance cost per bond is $91.13 each
Preferred stock is selling at $30 per share with a $3 per share issuance cost. The preferred stock offers a $5 per share annual dividend.
Common stock is selling at $35 per share and has an issuance cost of $5 per share. The dividend for next will be $4 and will grow at 3% annually thereafter.
SeaFair Hotel marginal tax rate is 40%.
The owners of SeaFair Hotel expects to earn at least a 15% return from this investment.
Question
What is the before tax cost of debt ?
(percentage)
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