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Category > Accounting Posted 15 Dec 2017 My Price 10.00

Calculate the cost of the company's retained earnings

What formula do I use in excel to explain the answer given in the four problems below:

The corporate treasurer of Ajax Company expects the company to grow at 4% in the future, and debt securities
at 6% interest (tax rate = 30%) to be a cheaper option to finance the growth. The current market price per share
of its common stock is $39, and the expected dividend in one year is $1.50 per share. Calculate the cost of the company's
retained earnings and check if the treasurer's assumption is correct.
Answer: Cost of debt after tax is 4.20%
Cost of retained earnings is 7.85%


The risk-free rate on 10-year U.S. Treasury bills is 3% and the expected rate of return on the overall stock market is 11%.
The company has a beta of 1.6. What is the cost of equity?
Answer: The cost of equity is 15.80%


A company has a capital structure as follows:
Total Assets $600,000
Debt $300,000
Preferred Stock $100,000
Common Equity $200,000
What would be the minimum expected return from a new capital investment project to satisfy the suppliers of the capital?
Assume the applicable tax rate is 40%, interest on debt is 11%, flotation cost per share of preferred stock is $0.75, and
flotation cost per share of common stock is $4. The preferred and common stocks are selling in the market for $26 and $143
a share respectively, and they are expected to pay a dividend of $2 and $7, repectively, in one year. The company's dividends
are expected to grow at 13% per year. The firm would like to maintain the existing capital structure to finance the new
project.
Answer: The minimum expected return from a new capital investment project is the WACC plus any additional risk premium.
Since no additional risk is mentioned, we will use the WACC.
Cost of debt after tax is 6.60%
Cost of preferred stock is 7.92%
Cost of common stock is 18.04%
WACC is 10.63%


A corporate bond has a face value of $1,000 and an annual coupon interest rate of 7%. Interest is paid annually.
10 years of the life of the bond remain. The current market price of the bond is $872. To the nearest whole percent,
what is the yield to maturity (YTM) of the bond today?
Answer: 9%
face value $1,000
Maturity Value today $872.00
Number of years 10
interest rate 7%

using excel formula
yield to maturity 9%

The yield to maturity is the rate
return expected on a bond if eld until the maturity date.

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CourseLover
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Status NEW Posted 15 Dec 2017 10:12 AM My Price 10.00

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