What is the cost of debt for Foggy Futures Weather Forecasters?The firm is in the 40% tax bracket.The optimal capital structure is listed below:Source of CapitalWeightLong-Term Debt25%Preferred Stock20%Common Stock55%Debt:The firm can issue $1000 par value, 8% coupon interest bonds with a 20 yearmaturity date.The bond has an average discount of $30 and flotation costs of$30 per bond.The selling price is $1000.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 23P

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

What is the cost of debt for Foggy Futures Weather Forecasters?The firm is in the 40% tax bracket.The optimal capital structure is listed below:Source of CapitalWeightLong-Term Debt25%Preferred Stock20%Common Stock55%Debt:The firm can issue $1000 par value, 8% coupon interest bonds with a 20 yearmaturity date.The bond has an average discount of $30 and flotation costs of$30 per bond.The selling price is $1000.PreferredStockThe firm can sell preferred stock with a dividend that is 8% of the currentprice.The stock costs $95.The cost of issuing and selling the stock isexpected to be $5 per share.CommonStock:The firm’s common stock is currently selling for $90 per share.The firmexpects to pay cash dividends of $7 per share next year.The dividends havebeen growing at 6%.The stock must be discounted by $7 and flotation costsare expected to amount to $5 per share.RetainedEarnings:The firm expects to have enough retained earnings in the comi

Definition Definition Type of stock which is granted priority over dividend distributions as compared to common stockholders. Preferred stocks also do not carry any voting rights. Notably, in a case where a company is going to be liquidated, preferred stockholders have a priority claim on the value of assets of the company as quoted in the balance sheet, as compared to the common stockholders.

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