A corporate bond has a face value of 1,000 and a coupon rate of 9. The bond matures in 14 years
and has a current market price of 946. If the corporation sells more bonds, it will incur flotation
costs of 26 per bond.
If the corporate tax rate is 35, what is the after-tax cost of debt capital?
A) 6.56 B) 5.57 C) 8.18 D) 7.31
Question 2
According to the residual theory of dividends,
A) dividend payments are a constant percentage of earnings per share.
B) a dividend is the residual above the payout ratio.
C) dividends are a residual after investment financing needs have been met.
D) earnings remaining after payment of preferred stock dividends should be paid to common
stockholders.
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