EBK CFIN
5th Edition
ISBN: 9781305888036
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Question
Chapter 11, Problem 3PROB
Summary Introduction
Cost of preferred stock:
It is the cost to be incurred for issuing the preferred stock. Cost of preferred is the ratio of the preference dividend to price of the
Calculate the preferred stock as follows:
BC plans to issue to preferred stock with par $120 par value and preference
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Buoyant Cruises plans to issue preferred stock with a $110 par value and a 6 percent dividend. Even though the current market value of its preferred stock is $80 per share, Buoyant expects to net only $75 for each share issued. What is its cost of issuing preferred stock? The firm's marginal tax rate is 34 percent.
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Palmetto Corporation has preferred stock that pays a 9% dividend. If the firm issues new shares, each share will be sold for the $50 par value. Flotation costs will be 3 percent of the stock price. The firm's marginal tax rate is 34 percent. What is the firm's cost of preferred stock financing?
A firm has preferred stock that pays an 10 percent dividend on a $75 par value. If a new issue is offered, flotation costs will be 3 percent of the current market price of $80. The firm's marginal tax rate is 35 percent. What is the firm's cost of preferred stock financing?
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- Suppose IWT has decided to distribute $50 million, which it presently is holding in liquid short-term investments. IWT’s value of operations is estimated to be about $1,937.5 million; it has $387.5 million in debt and zero preferred stock. As mentioned previously, IWT has 100 million shares of stock outstanding. Assume that IWT has not yet made the distribution. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? Now suppose that IWT has just made the $50 million distribution in the form of dividends. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? Suppose instead that IWT has just made the $50 million distribution in the form of a stock repurchase. Now what is IWT’s intrinsic value of equity? How many shares did IWT repurchase? How many shares remained outstanding after the repurchase? What is its intrinsic stock price per share after the repurchase?arrow_forwardA firm has preferred stock that pays an 8 percent dividend on a $75 par value. If a new issue is offered, flotation costs will be 3 percent of the current market price of $80. The firm's marginal tax rate is 35 percent. What is the firm's cost of preferred stock financing? Group of answer choicesarrow_forwardApollo has $5,000,000 outstanding of 8 percent preferred stock; the company has a 40 percent tax rate. What is the after-tax cost of the preferred stock? (Hint: ask yourself, does the issuing company get a tax break on preferred stock dividends?)arrow_forward
- DEF Company's current share price is $17 and it is expected to pay a $1.55 dividend per share next year. After that, the firm's dividends are expected to grow at a rate of 2.7% per year. What is an estimate of DEF Company's cost of equity? DEF Company also has preferred stock outstanding that pays a $2.45 per share fixed dividend. If this stock is currently priced at $25.6 per share, what is DEF Company's cost of preferred stock?arrow_forwardParadise Travels is an all-equity firm that has 9,000 shares of stock outstanding at a market price of $27 a share. Management has decided to issue $25,000 worth of debt and use the funds to repurchase shares of the outstanding stock. The interest rate on the debt will be 7.3 percent. What are the earnings per share at the break-even level of earnings before interest and taxes? Ignore taxes.arrow_forwardBarton Industries can issue perpetual preferred stock at a price of $52 per share. The stock would pay a constant annual dividend of $3.80 per share. If the firm's marginal tax rate is 40%, what is the company's cost of preferred stock? Round your answer to 2 decimal places.arrow_forward
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