Nico Trading corporation is considering issuing long-term debt. The debt would have a 30 year maturity an a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm's tax rate is 35 percent. Given this information, the after tax cost of debt for Nico Trading would be?

7.26%

Ans: 7.26%

N=30
I=
PV=900 (1000)(1-.05-.05)
PMT=-100
FV= -1000

I= 11.65(1-.35)= 7.26%

True answer

Cost of capital

1. Nico Trading Corporation is considering issuing long-term debt. The debt would have a 30 year maturity and a 10 percent coupon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm's tax rate is 35 percent. Given this information, what is the after tax cost of debt for Nico Trading?
2. Tangshan Mining is considering issuing long-term debt. The debt would have a 30 year maturity and a 12 percent coupon rate and make semiannual coupon payments. In order to sell the issue, the bonds must be underpriced at a discount of 2.5 percent of face value. In addition, the firm would have to pay flotation costs of 2.5 percent of face value. The firm's tax rate is 33 percent. Given this information, what is the after tax cost of debt for Tangshan Mining?
3. Ahmed is interested in purchasing a bond issued by Sony. He has obtained the following information on the security:
Par value = $1000 coupon rate = 6% bond price = $930, years to maturity = 10 tax rate =20%...calculate the after tax cost of the Sony.
4. A firm has issued 10 percent preferred stock, which sold for $100 per share par value. The cost of issuing and selling the stock was $2 per share. The firm's marginal tax rate is 40 percent. What is the cost of the preferred stock?
5. A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. What is the cost of the preferred stock?
6. A firm has a beta of 1.2. The market return equals 14 percent and the risk-free rate of return equals 6 percent. What is the estimated cost of common stock equity?
7. A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5 percent. What is the cost of the firm's common stock equity?
8. A firm has common stock with a market price of $55 per share and an expected dividend of $2.81 per share at the end of the coming year. The dividends paid on the outstanding stock over the past five years are as follows:

What is the cost of the firm's common stock equity?

9. A firm has common stock with a market price of $100 per share and an expected dividend of $5.61 per share at the end of the coming year. A new issue of stock is expected to be sold for $98, with $2 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total $1 per share. The dividends paid on the outstanding stock over the past five years are as follows:

What is the cost of this new issue of common stock?

10. A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.

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 of 5%. 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. The required rate of return is 12%
Calculate:
a. The firm's before-tax cost of debt.
b. The firm's after-tax cost of debt.
c. The firm's cost of preferred stock.
d. The firm's cost of retained earnings.
e. The firm's cost of a new issue of common stock.
f. The weighted average cost of capital up to the point when retained earnings are exhausted.
g. The weighted average cost of capital after all retained earnings are exhausted.

11. ) A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions:



Debt: The firm can sell a 20-year, $1,000 par value, 9 percent bond for $980. A flotation cost of 2 percent of the face value would be required in addition to the discount of $20.
Preferred Stock: The firm has determined it can issue preferred stock at $65 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: The firm's common stock is currently selling for $40 per share. The dividend expected to be paid at the end of the coming year is $5.07. Its dividend payments have been growing at a constant rate of 8%. It is expected that to sell, a new common stock issue must be underpriced at $1 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm's marginal tax rate is 40 percent. The required return is 12%
Calculate the firm's weighted average cost of capital assuming the firm has exhausted all retained earnings.

firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.





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.

what is wacc

To calculate the after-tax cost of debt for Nico Trading Corporation, you need to consider the various factors involved:

1. Coupon Rate: The coupon rate of the debt is given as 10%. This represents the annual interest payment as a percentage of the bond's face value.

2. Underpricing: The bonds need to be underpriced at a discount of 5% of face value in order to be sold. This means the issue price will be 95% of face value.

3. Flotation Costs: The firm will need to pay flotation costs of 5% of face value in order to issue the debt. This represents the additional expenses associated with the issuance.

4. Tax Rate: The tax rate for Nico Trading Corporation is given as 35%. This indicates the percentage of taxable income that the company pays in taxes.

To calculate the after-tax cost of debt, you can use the following formula:

After-tax Cost of Debt = (Coupon Payment - Tax Savings) / (Issue Price - Flotation Costs)

Now, let's break down the calculation:

1. Calculate the coupon payment:

Coupon Payment = Coupon Rate * Face Value = 10% * Face Value

2. Calculate the tax savings:

Tax Savings = Tax Rate * (Coupon Payment - Flotation Costs)

3. Calculate the issue price:

Issue Price = Face Value - (Discount * Face Value) = Face Value - (5% * Face Value)

4. Substitute the values into the formula and calculate the after-tax cost of debt.

Please provide the value of the face value to proceed with the calculation.

Ans: 7.26%

N=30
I=
PV=900 (1000)(1-.05-.05)
PMT=-100
FV= -1000

I= 11.65(1-.65)= 7.26%