Wallace Container Company issued $100 par value preferred stock 12 years ago. The stock provided a 9 percent yield at the time of issue. The preferred stock is now selling for $72. What is the current yield or cost of the preferred stock? ( Disregard flotation costs. Solution: Wallace Container Company D Yield==P==12.5% P$72 l1-12 The treasurer of Bio Science, Inc, is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock Based on the following facts. is she correct? Debt can be issued at a yield of 1l percent, and the corporate tax rate is 30 percent. Preferred stock will be priced at $50, and pay a dividend of$4.80. The floatation cost on the preferred stock is $2.10 Solutio Bio Science. Inc. Aftertax cost of debt Kd =Yield ( 11%(1-30)=11%(.70)=7.70% ftertax cost of preferred stock K $4.80 $4.80 10.02 $50-$2.10$47.90 Yes, the treasurer is correct. The difference is 2. 32%(7.70% versus 10.02%) S-391 CopyrightC2005 by The McGraw-Hill Companies, IncCopyright © 2005 by The McGraw-Hill Companies, Inc. S-391 11-11. Wallace Container Company issued $100 par value preferred stock 12 years ago. The stock provided a 9 percent yield at the time of issue. The preferred stock is now selling for $72. What is the current yield or cost of the preferred stock? (Disregard flotation costs.) Solution: Wallace Container Company 12.5% $72 $9 P D Yield p p = = = 11-12. The treasurer of Bio Science, Inc., is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock. Based on the following facts, is she correct? Debt can be issued at a yield of 11 percent, and the corporate tax rate is 30 percent. Preferred stock will be priced at $50, and pay a dividend of $4.80. The floatation cost on the preferred stock is $2.10. Solution: Bio Science, Inc. Aftertax cost of debt Kd = Yield (1 – T) = 11% (1 – .30) = 11% (.70) = 7.70% Aftertax cost of preferred stock 10.02% $47.90 $4.80 $50 $2.10 $4.80 P F D K p p p = = − = − = Yes, the treasurer is correct. The difference is 2.32% (7.70% versus 10.02%)