1A Calculate the aftertax cost of debt if an interest rate i

1A. Calculate the after-tax cost of debt if an interest rate is 13 percent and the tax rate is 31 percent. Express your answer in percentage (without the % sign) and round it to two decimal places.

1B. Bouchard Company\'s stock sells for $ 18 per share, its last dividend (D₀) was $1.00, and its growth rate is a constant 4 percent. What is its cost of common stock, r_s? Express your answer in percentage (without the % sign) and round it to two decimal places.

Solution

1A) Calculation of after tax cost of debt: After tax cost of debt= Interest rate*(1-tax rate)                                            = 13*(1-0.31)                                             = 13*0.69= 8.97 After tax cost of debt= 8.97 1B)Calculation of cost of common stock:: D1=D0(1+growth)=1(1+0.04)= $1.04 growth= 4% Price= $18 Cost of common stock= D1/ Price + growth                                 =1.04/18+0.04                                 =0.0578+0.04                                  =0.0978 Cost of common stock= 9.78