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# If underpricing and flotation costs on new shares of common stock amount to \$7.00 per share

INSTRUCTIONS TO CANDIDATES

Time Value of Money

1. Complete the Table Below

Amount of Annuity Interest Rates Deposit Period( annuall y) Future Value of Ordinary Annuity Future Value of Annuity Due Present Value of Ordinary Annuity Present Value of Annuity Due

\$2,500.00 8% 10

500.00 12% 6

30,000.00 20% 5

11,500.00 9% 8

6,000.00 14% 30

Interest Rates and Bond Valuation

Given below are information on five possible bond investments that pays interest on an annual basis. Compute for the Yield to Maturity of each bond and rank the following – 1 as the best priority investment option and 5 as the least priority investment option.

Bond Par Value in \$ Coupon

Interest Rates in % Years to Maturity Current Value in \$ Yield to Maturity Rank

A 1,000.00 9 8 820.00

B 1,000.00 12 16 1,000.00

C 500.00 12 12 560.00

D 1,000.00 15 10 1,120.00

E 1,000.00 5 3 900.00

Cost of Capital

Edna Recording Studios, Inc., reported earnings available to common stock of

\$4,200,000 last year. From those earnings, the company paid a dividend of \$1.26 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 40% debt, 10% preferred stock, and 50% common stock. It is taxed at a rate of 40%.

1. If the market price of the common stock is \$40 and dividends are expected to grow at a rate of 6% per year for the foreseeable future, what is the company’s cost of retained earnings financing?

2. If underpricing and flotation costs on new shares of common stock amount to

\$7.00 per share, what is the company’s cost of new common stock financing?

3. The company can issue \$2.00 dividend preferred stock for a market price of

\$25.00 per share. Flotation costs would amount to \$3.00 per share. What is the cost of preferred stock financing?

4. The company can issue \$1,000-par-value, 10% coupon, 5-year bonds that can be sold for \$1,200 each. Flotation costs would amount to \$25.00 per bond. Use the estimation formula to figure the approximate cost of debt financing.

5. What is the WACC?

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