# ACCOUNTING

1.       The Dentite Corporation’s bonds are currently selling to yield new buyers a 12% return on their investment.  Dentite’s marginal tax rate including both federal and state taxes is 38%.  What is the firm’s cost of debt?

12.       Kleig Inc.’s bonds are selling to yield 9%.  The firm plans to sell new bonds to the general public and will therefore incur flotation costs of 6%.  The company’s marginal tax rate is 42%.

a. What is Kleig’s cost of debt with respect to the new bonds? (Hint: Adjust the cost of debt formula to include flotation costs.)

b. Suppose Kleig also borrows directly from a bank at 12%.

1. What is its cost of debt with respect to such bank loans? (Hint: Would bank loans be subject to flotation costs?)

2. If total borrowing is 60% through bonds and 40% from the bank, what is Kleig’s overall cost of debt?   (Hint: Think weighted average.)

Cost of Preferred Stock: Example 13-4 (page 568)

13.       Harris Inc.’s preferred stock was issued five years ago to yield 9%.  Investors buying those shares on the secondary market today are getting a 14% return.  Harris generally pays flotation costs of 12% on new securities issues.  What is Harris’s cost of preferred financing?

14.       Fuller, Inc. issued \$100, 8% preferred stock five years ago.  It is currently selling for \$84.50.  Assuming Fuller has to pay floatation costs of 10%, what is Fuller’s cost of preferred stock?

15.       A few years ago Hendersen Corp issued preferred stock paying 8% of its par value of \$50.  The issue is currently selling for \$38.  Preferred stock flotation costs are 15% of the proceeds of the sale.  What is Hendersen’s cost of preferred stock?

16.       New buyers of Simmonds Inc. stock expect a return of about 22%.  The firm pays flotation costs of 9% when it issues new securities.  What is Simmonds’ cost of equity (Hint: This problem is very simple since we don’t have to estimate the investors’ return.)

a. From retained earnings?

b. From new stock?

17.  Klints Inc. paid an annual dividend of \$1.45 last year.  The firm’s stock sells for \$29.50 per share, and the company is expected to grow at about 4% per year into the foreseeable future.  Estimate Klints’ cost of retained earnings.

Cost of RE and New Stock: Examples 13-6 and 13-8 (pages 570 and 572)

18.       The Pepperpot Company’s stock is selling for \$52.  Its last dividend was \$4.50, and the firm is expected to grow at 7% indefinitely.  Flotation costs associated with the sale of common stock are 10% of the proceeds raised.  Estimate Pepperpot’s cost of equity from retained earnings and from the sale of new stock.

19.       The Longlife Insurance Company has a beta of .8.  The average stock currently returns 15% and short-term treasury bills are offering 6%.  Estimate Longlife’s cost of retained earnings.

20.       The Longlife Insurance Company of the preceding problem has several bonds outstanding that are currently selling to yield 9%.  What does this imply about the cost of the firm’s equity?

21.       Hammell Industries has been using 10% as its cost of retained earnings for a number of years.  Management has decided to revisit this decision based on recent changes in financial markets.  An average stock is currently earning 8%, treasury bills yield 3.5%, and shares of Hammell’s stock are selling for \$29.44.  The firm just paid a dividend of \$1.50, and anticipates growing at 5% for the foreseeable future.  Hammell’s CFO recently asked an investment banker about issuing bonds and was told the market was demanding a 6.5% coupon rate on similar issues.  Hammell stock has a beta of 1.4.  Recommend a cost of retained earnings for Hammell.

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