ABC Company has a target Debt Ratio of 60%. ABC has a debt issue outstanding that is currently trading at 105% of its pa
Posted: Sun May 08, 2022 10:14 am
ABC Company has a target Debt Ratio of 60%. ABC has a debt issue
outstanding that is currently trading at 105% of its par value of
$1,000. The outstanding issue pays annual interest payments, has a
coupon rate of 8.20%, and 7 years remaining until maturity;
new debt with a 30-year original maturity will incur an 5%
flotation cost. Further, ABC's common stock trades currently at a
price of $36.45 and the market expects ABC to pay a dividend
in one year of $3.8 (ABC just paid a dividend of $3.42, and
this growth rate is expected to continue); ABC pays out all net
income as dividends; and new equity will incur a 12% flotation
cost. ABC’s tax rate is 32%.
a. What is the YTM on ABC’s existing debt?
b. What is ABC's before tax cost of debt?
c. What is ABC's after-tax cost of debt?
d. What is ABC’s expected future growth rate?
e. What is ABC's cost of internal equity?
f. What is ABC’s cost of external equity?
outstanding that is currently trading at 105% of its par value of
$1,000. The outstanding issue pays annual interest payments, has a
coupon rate of 8.20%, and 7 years remaining until maturity;
new debt with a 30-year original maturity will incur an 5%
flotation cost. Further, ABC's common stock trades currently at a
price of $36.45 and the market expects ABC to pay a dividend
in one year of $3.8 (ABC just paid a dividend of $3.42, and
this growth rate is expected to continue); ABC pays out all net
income as dividends; and new equity will incur a 12% flotation
cost. ABC’s tax rate is 32%.
a. What is the YTM on ABC’s existing debt?
b. What is ABC's before tax cost of debt?
c. What is ABC's after-tax cost of debt?
d. What is ABC’s expected future growth rate?
e. What is ABC's cost of internal equity?
f. What is ABC’s cost of external equity?