BUSI 2743 – PRINCIPLES OF FINANCE Chapter 9 Problems (50 po

BUSI 2743 – PRINCIPLES OF FINANCE Chapter 9 Problems (50 points)… BUSI 2743 – PRINCIPLES OF FINANCEChapter 9 Problems (50 points) Problem 1: Cost of Debt. Joy, Inc. is planning on issuing new bonds to raise capital. Joy’s investment banking firm indicates that different maturities will carry different coupon rates and thus sell at different prices. Each bond issue, however, will have a $1000 par value, with flotation costs of $50 per bond. Joy’s tax rate is 21%. Calculate Joy’s current required rate of return of their long-term debt for each of the following alternatives. AlternativeCoupon RateTime to Maturity (Years)Premium (Discount)A7.2%6$50B6.7%7$0C6.5%12($60)D8.5%18$95Assume that Joy, Inc. plans on issuing new long-term debt to sell at par. Calculate the before-tax and after-tax cost of debt for each alternative. Problem 2: Cost of Preferred Stock ABC currently has no preferred stock, but is planning on issuing some. To determine what dividend the preferred stock would require, ABC’s investment bankers have presented it with information on four of ABC’s competitors, as shown below. Calculate the required rate of return on each of ABC’s competitor’s preferred stock.ABC’s investment bankers estimated that it could issue new, $100 preferred stock to sell at par, with 5% flotation costs. Given the required rate of return of each competitor, what is ABC’s cost of preferred stock for comparable issues?  StockParSale PriceAnnual DividendA$100$10312%B$60$5510%C$50$55$6.00D$40$3610% Problem 3: Cost of Common Stock – CAPM The Hot Shot Company’s common stock has a beta of 1.4. The risk-free rate is 3%, and the market return is 11%. What is HSC’s cost of common stock equity?   Problem 4: Retained Earnings versus New Common Stock Using the data shown in the following table, calculate each firm’s:Cost of retained earnings ()Cost of new common stock () FirmMarket Price per shareDividend Growth RateUnderpricing per shareFlotation cost per shareA$808%$2.80$2.00$1.00B$306%1.50$1.00$1.80C$457%2.40$1.50$2.00D$224%2.10$2.50$1.75 Problem 5: WACC – Book Weights and Market Weights JB Entertainment, Inc.’s capital structure is as follows. SourceBook ValueMarket ValueAfter-tax CostLong-term debt$6,000,000 $5,800,000 5.40%Preferred stock$1,200,000 $1,400,000 11.60%Common stock$5,200,000 $8,200,000 14.40%Totals$12,400,000 $15,400,000  Calculate JBE’s weighted-average-cost-of-capital using book value weights. Calculate JBE’s weighted-average-cost-of-capital using market value weights. Compare your answers in parts A and B. ExplainBusiness Finance FINC 2743

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