The treasurer of Riley Coal Company is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 5 percent less than that for preferred stock. Debt can be issued at a yield of 8.0 percent, and the corporate tax rate is 25 percent. Preferred stock will be priced at $52 and pay a dividend of $5.20. The flotation cost on the preferred stock is $3. a. Compute the aftertax cost of debt. Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Aftertax cost of debt % b. Compute the aftertax cost of preferred stock. Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Aftertax cost of preferred stock c. Based on the facts given above, is the treasurer correct? No, the treasurer is incorrect. Yes, the treasurer is correct.

The treasurer of Riley Coal Company is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 5 percent less than that for preferred stock. Debt can be issued at a yield of 8.0 percent, and the corporate tax rate is 25 percent. Preferred stock will be priced at $52 and pay a dividend of $5.20. The flotation cost on the preferred stock is $3. a. Compute the aftertax cost of debt. Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Aftertax cost of debt % b. Compute the aftertax cost of preferred stock. Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Aftertax cost of preferred stock c. Based on the facts given above, is the treasurer correct? No, the treasurer is incorrect. Yes, the treasurer is correct.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 11P

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