NAME: SAMRA EJAZ

COURSE: IBF
FACULTY: MISS UROOJ
CHAP (11) PROBLEMS

Problem 11-1:

Solution:
Semi annual month = 30 x 2 = 60
6
Semi annual interest = 1000 x 0.14 x 12 = 70
F−P
C+
n
Yield to maturity ¿ F+P
2
1000−1353.54
70+
60
= 1000+1353.54
2
−353.54
70+
60
= 2353.54
2
70−5.8923
= 1176.77

= 0.545 or (5.45 x 2) = 10.90% annually

After tax cost of debt = 10.90(1 – 0.40) = 6.54%
Problem 11-2:
Solution:
Yield to maturity ( YTM) = 12%
Marginal tax rate = 34%
Coupon = 10%
After tax cost of debt = r dt =r d x(1−t )

= 12% x ( 1 – 0.34 )
= 12% x 0.66
= 7.92%.

Problem 11-4:
Solution:
Preferred stock dividend = 100
Current selling price = 97
Floatation cost = 5%
Preference dividend = 11%

The cost of preferred stock, r psis,

D ps
r ps =
P0 (1−f )

100(0.11)
= 97(1−0.05)
11
= 92.15 ¿
¿
 r ps= 11.94 %

Problem 11-5:

Solution:
Current price = $125
Dividend = $15
D ps
r ps =
P0 (1−f )

15
Cost of preferred stock = 125 x (1−0.03)
15
= 121.25

= 12.4 %.

Problem 11-7:
Solution:
G = 5%
Po = 70
Do = 5.60
F = 7%
T = 35%
Cost of retained earnings, r s is,
 D 0 (1+g)
r s= +g
P0

5. 60 ( 1 .05 )
= 70
+0 . 05

5. 88
= 70
+0 . 05

= 0.084 + 0.05
= 0.134
= 13%.

The cost of new equity r e is,

D 0 (1+g)
re = P0 (1−f ) +g
5 . 60 ( 1. 05 )
= 70(1−0 . 07)
+ 0 .05

5 . 88
¿ +0 . 05
65. 10

= 0.09 + 0.05
= 0.14
= 14%.

Problem 11-10:
Solution:
D 1= D 0 x ( 1+g )
= 2 x ( 1 + 0.07 )
= 2.14.
 D1
Cost of retained earnings = P 0 (1−f ) +g
2.14
= 30(1−0.25) + 0.07

= 0.095 + 0.07
= 0.165
Marginal cost of equity capital is 16.5%.

Problem 11-17:
Solution:
rd = 13%
rs = 16%
T = 40%
1728
Weight of equity, Ws = 2880 = 0.6

1152
Weight of debt, Wd = 2880 = 0.4

WACC = w d R (1−T )+W

d s Rs

= 0.4 (13%) (1-0.4) + 0.6 (16%)

= 0.0312 + 0.096
= 0.1272
= 12.72%.
WACC = 12.72%.