Summary ProblemSet 9.docx BADM-534 Problem Set - Chapter 9 Business Administration, University of the Cumberlands Managerial Finance (BADM-534) Problem Set # 9 The stock of Matrix Computing sells for $65, and last year s dividend was $2.53. Security an

BADM-534

Problem Set - Chapter 9


Business Administration, University of the Cumberlands

Managerial Finance (BADM-534)



Problem Set # 9

The stock of Matrix Computing sells for $65, and last year’s dividend was $2.53.
Security analysts are projecting that the common dividend will grow at a rate of 9% a
year. A flotation cost of 12% would be required to issue new common stock. Matrix’s
preferred stock sells for $42.00, pays a dividend of $3.32 per share, and new preferred
stock could be sold with a flotation cost of 10%. The firm has outstanding bonds with 25
years to maturity, a 15% annual coupon rate, semiannual payments, $1,000 par value.
The bonds are trading at $1,271.59. The tax rate is 20%. The market risk premium is
5.5%, the risk-free rate is 7.0%, and Matrix’s beta is 1.2. In its cost-of-capital
calculations, Matrix uses a target capital structure with 40% debt, 10% preferred stock,
and 50% common equity.

1. Calculate the cost of each capital component—in other words, the after-tax cost
of debt, the cost of preferred stock (including flotation costs), and the cost of
equity (ignoring flotation costs). Use both the CAPM method and the dividend
growth approach to find the cost of equity.


Cost of preferred stock including floatation costs
Dpf
 $ 3.327.90 %
o r pf Net P $ 42.00 pf

Cost of Equity using Divided Growth Approach
D0 1g $ 2.531 9%
rs  g
P0 $ 65 9%