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Examine the following book-value balance sheet for University Products Inc. The preferred stock currently sells for $15 per share and the common stock for $20 per share. There are

1,000 common shares and 100 preferred shares outstanding. Bonds currently have a quoted price of 93.58.

Preferred shares pay a 7.5% dividend. The beta of the common stock is 1.5, the expected return on the market is 11%, and the risk free rate is 4%. The company’s tax rate is 40%

1.What is the cost of debt?

2.What is the cost of preferred shares?

3.What is the cost of common equity?

Assets Liabilities and Owners Equity

Cash & short term securities

$1,000

Bonds, coupon =8%, paid semi-annually (maturity = 10 years)

$10,000

Accounts Receivable

3,000

Preferred stock (par value $20 per share)

2,000

Inventories

7,000

Common Stock

10,000

Plant & equipment

21,000

Retained earnings

10,000

Total

$32,000

Total

$32,000

Assets Liabilities and Owners Equity

Cash & short term securities

$1,000

Bonds, coupon =8%, paid semi-annually (maturity = 10 years)

$10,000

Accounts Receivable

3,000

Preferred stock (par value $20 per share)

2,000

Inventories

7,000

Common Stock

10,000

Plant & equipment

21,000

Retained earnings

10,000

Total

$32,000

Total

$32,000

       

 

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