Introduction to Financial Management

8
Introduction to Financial
Management

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
QUESTION 1..................................................................................................................................1
QUESTION 2..................................................................................................................................2
QUESTION 3..................................................................................................................................3
QUESTION 4..................................................................................................................................3
QUESTION 5..................................................................................................................................4
REFERENCES................................................................................................................................7

QUESTION 1
Item Symbol Value
Risk Free Rate Rf 7%
Stock Risk B 1.5
Market Return Rm 25%
Interest Rate for Debt Rd (B.T) 9%
TAX rate T 5%
Preferred Stock Dividend D(ps) 10
Preferred Stock Price P(ps) 100
floatation cost Ps FC 4%
Solution:
1. Calculate the cost of common stocks: (Rs)
Cost of common stock (Rs)
(Rf + (Rm - Rf)*beta
7% + (25%-7%)*1.5
7% + 27%
34%
2. Calculate the cost of Preferred stocks: (Rps)
Cost of preferred stock (Rps)
(D/ P)+FC
(10/100)+4
14%
3. Calculate the cost of Debt: (Rd)
Cost of debt (Rd)
D(1-t)
9(1-0.5)
8.55%
1