Builtrite has come up with the following capital structure which management believes is optimal: Debt 40% Preferred stock 10% Common stock 50% Bonds: Builtrite is planning on offering a $1000 par value, 20-year, 8% coupon bond with an expected selling price of $1025. Flotation costs would be $55 per bond. Preferred Stock: Builtrite could sell a $49 par value preferred with an 8% coupon for $42 a share. Flotation costs would be $2 a share. Common stock: Currently, the stock is selling for $62 a share and has paid a $2.82 dividend. Dividends are expected to continue growing at 10%. Flotation costs would be $3.75 a share and Builtrite has $350,000 in available retained earnings. Assume a 40% tax bracket. What is the after-tax cost of preferred stock? 9.80% O 6.47% O 9.68% ○ 8.76% #3 E F3 F4 *- 54 R % 285 T F6 6 Y F7 & 7 C FB 8 *CO P

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter12: The Cost Of Capital
Section: Chapter Questions
Problem 17P
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F1

Builtrite has come up with the following capital structure which management believes is optimal:
Debt
40%
Preferred stock
10%
Common stock
50%
Bonds: Builtrite is planning on offering a $1000 par value, 20-year, 8% coupon bond with an expected
selling price of $1025. Flotation costs would be $55 per bond.
Preferred Stock: Builtrite could sell a $49 par value preferred with an 8% coupon for $42 a share.
Flotation costs would be $2 a share.
Common stock: Currently, the stock is selling for $62 a share and has paid a $2.82 dividend. Dividends
are expected to continue growing at 10%. Flotation costs would be $3.75 a share and Builtrite has
$350,000 in available retained earnings.
Assume a 40% tax bracket.
What is the after-tax cost of preferred stock?
9.80%
O 6.47%
O 9.68%
○ 8.76%
#3
E
F3
F4
*-
54
R
%
285
T
F6
6
Y
F7
&
7
C
FB
8
*CO
P
Transcribed Image Text:Builtrite has come up with the following capital structure which management believes is optimal: Debt 40% Preferred stock 10% Common stock 50% Bonds: Builtrite is planning on offering a $1000 par value, 20-year, 8% coupon bond with an expected selling price of $1025. Flotation costs would be $55 per bond. Preferred Stock: Builtrite could sell a $49 par value preferred with an 8% coupon for $42 a share. Flotation costs would be $2 a share. Common stock: Currently, the stock is selling for $62 a share and has paid a $2.82 dividend. Dividends are expected to continue growing at 10%. Flotation costs would be $3.75 a share and Builtrite has $350,000 in available retained earnings. Assume a 40% tax bracket. What is the after-tax cost of preferred stock? 9.80% O 6.47% O 9.68% ○ 8.76% #3 E F3 F4 *- 54 R % 285 T F6 6 Y F7 & 7 C FB 8 *CO P
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