The Sunland Products Co. currently has debt with a market value of $275 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) that have a maturity of 15 years and are currently priced at $961.99 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $20 per share. The preferred shares pay an annual dividend om $1.20. Sunland also has 14 million shares of common stock outstanding with a price of $20.00 per share. The firm is expected to pay a $2.20 common dividend one year from today, and that dividend is expected to increase by 8 percent per year forever. If Sunland is subject to a 28 percent marginal tax rate. Calculate the appropriate cost of capital for a new project that is financed with the same proportion of debt, preferred shares, and common shares as the firm's current capital structure. Assume that the project has the same degree of systematic risk as the average project that the firm is currently undertaking. Also assume that the project is in the same general industry as the firm's current line of business. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%) Appropriate cost of capital
The Sunland Products Co. currently has debt with a market value of $275 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) that have a maturity of 15 years and are currently priced at $961.99 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $20 per share. The preferred shares pay an annual dividend om $1.20. Sunland also has 14 million shares of common stock outstanding with a price of $20.00 per share. The firm is expected to pay a $2.20 common dividend one year from today, and that dividend is expected to increase by 8 percent per year forever. If Sunland is subject to a 28 percent marginal tax rate. Calculate the appropriate cost of capital for a new project that is financed with the same proportion of debt, preferred shares, and common shares as the firm's current capital structure. Assume that the project has the same degree of systematic risk as the average project that the firm is currently undertaking. Also assume that the project is in the same general industry as the firm's current line of business. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%) Appropriate cost of capital
Chapter20: Financing With Derivatives
Section: Chapter Questions
Problem 17P
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Transcribed Image Text:The Sunland Products Co. currently has debt with a market value of $275 million outstanding. The debt consists of 9 percent coupon
bonds (semiannual coupon payments) that have a maturity of 15 years and are currently priced at $961.99 per bond. The firm also has
an issue of 2 million preferred shares outstanding with a market price of $20 per share. The preferred shares pay an annual dividend of
$1.20. Sunland also has 14 million shares of common stock outstanding with a price of $20.00 per share. The firm is expected to pay a
$2.20 common dividend one year from today, and that dividend is expected to increase by 8 percent per year forever. If Sunland is
subject to a 28 percent marginal tax rate. Calculate the appropriate cost of capital for a new project that is financed with the same
proportion of debt, preferred shares, and common shares as the firm's current capital structure. Assume that the project has the same
degree of systematic risk as the average project that the firm is currently undertaking. Also assume that the project is in the same
general industry as the firm's current line of business. (Round Intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to
2 decimal places, eg. 15.25%)
Appropriate cost of capital
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