Edit question
A firm has determined its optimal capital structure which is composed of the following sources
and target market value proportions. Please show the formula and work.
- Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of
2 percent of the face value would be required in addition to the discount of $40.
- Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value.
The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per
share.
- Common Stock: A firm\'s common stock is currently selling for $18 per share. The dividend
expected to be paid at the end of the coming year is $1.74. Its dividend payments have been
growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is
expected that to sell, a new common stock issue must be underpriced $1 per share in floatation
costs. Additionally, the firm\'s marginal tax rate is 40 percent.
Please show the formula and the work for the below:
33) The firm\'s before-tax cost of debt is ________.
34) The firm\'s after-tax cost of debt is ________.
35) The firm\'s cost of preferred stock is ________.
36) The firm\'s cost of a new issue of common stock is ________. )
37) The firm\'s cost of retained earnings is ________.
38) The weighted average cost of capital up to the point when retained earnings are exhausted is
________.Source of CapitalTarget market ProportionsLong-term debt20%Preferred
Stock10Common stock equity70
Solution
33) PV = -(960 - 2%*1000) = -940; FV = 1000; n = 12; PMT = 70; CPT I/R, gives 7.79%
34) After tax cost of debt = 7.79%(1-0.40) = 4.67%
35). Cost of Preferred Stock(Kp) = Annual Dividend/(Current Market Price - Flotation Cost)
= $10/($75 - $3) = $10/$72 = 13.89%
36). Growth Rate = (dividend in year 5/dividend in year 0)1/n - 1
= (1.74/1.50)1/5- 1 = 3.01%
cost of a new issue of common stock = [D1/(P0-flotation cost)] + g
= [1.74/(18 - 1)] + 0.0301 = 0.1024 +0.0301 = 13.25%
37). cost of retained earnings = [D1/P0] + g
= [1.74/18] + 0.0301 = 0.0967 + 0.0301 = 12.67%
38). wacc = (weight of debt x after tax cost of debt) + (weight of preferred stock x cost of
preferred stock) + (weight of common stock x cost of retained earnings)
= (0.2 x 4.67%) + (0.1 x 13.89%) + (0.7 x 12.67%) = 11.19%.
Measures of Central Tendency: Mean, Median and Mode
EDP significantly affects the audit bychanging the nature of the .pdf
1. EDP significantly affects the audit by:
changing the nature of the audit trail
increasing the number of humans involved in processing transactions
eliminating the need for auditor judgment
reducing the auditor's need to understand technologyA)
changing the nature of the audit trailB)
increasing the number of humans involved in processing transactionsC)
eliminating the need for auditor judgmentD)
reducing the auditor's need to understand technology
Solution
EDP significantly affects the audit by changing the nature of the audit trail (Option (A))
