The problem describes a company, Qatar Airways, issuing debt and equity. We are given the details of the bond issue, including coupon rate, maturity, selling price, and flotation costs. We are also given information about the company's common stock, including current trading price, expected dividend, growth rate, stock underpricing, and flotation costs. We are asked to calculate: (a) The firm's before-tax cost of debt. (b) The firm's after-tax cost of debt. (c) The firm's cost of a new issue of common stock. (d) The weighted average cost of capital (WACC).

1. Problem Description

The problem describes a company, Qatar Airways, issuing debt and equity. We are given the details of the bond issue, including coupon rate, maturity, selling price, and flotation costs. We are also given information about the company's common stock, including current trading price, expected dividend, growth rate, stock underpricing, and flotation costs. We are asked to calculate:

(a) The firm's before-tax cost of debt.

(b) The firm's after-tax cost of debt.

(c) The firm's cost of a new issue of common stock.

(d) The weighted average cost of capital (WACC).

2. Solution Steps

(a) Before-tax cost of debt:

The bond has a face value of $1000, a coupon rate of 7$945, and the company paid $5 as a floatation cost per bond. The net amount received by the company is$945 - $5 =$

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0. We need to calculate the yield to maturity (YTM) to find the before-tax cost of debt. Since a direct calculation of YTM without financial calculator is tedious, we can approximate the YTM. Here we approximate YTM with coupon payment and face value and net amount received.

Coupon payment = 7% * $1000 =$70

Approximate YTM = (Coupon payment + (Face value - Net amount received)/Number of years) / ((Face value + Net amount received)/2)

Approximate YTM = ($70 + ($1000 - $940)/8) / (($1000 + $940)/2)

Approximate YTM = ($70 +$60/8) / ($1940/2)

Approximate YTM = ($70 +$7.5) / $970

Approximate YTM = $77.5 /$970

Approximate YTM = 0.0799

Approximate YTM = 7.99%

(b) After-tax cost of debt:

The after-tax cost of debt is calculated by multiplying the before-tax cost of debt by (1 - tax rate).

After-tax cost of debt = Before-tax cost of debt * (1 - Tax rate)

After-tax cost of debt = 0.0799 * (1 - 0.40)

After-tax cost of debt = 0.0799 * 0.60

After-tax cost of debt = 0.04794

After-tax cost of debt = 4.794%

(c) Cost of new equity:

We will use the Gordon Growth Model (Dividend Discount Model - DDM) to calculate the cost of equity. Since there is an underpricing of $3 and a flotation cost of$2, the net price is Current price - Underpricing - Flotation cost = $43 -$3 - $2 =$

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Cost of new equity = (Expected Dividend / Net Price) + Growth rate

Cost of new equity = ($2.50 /$38) + 0.08

Cost of new equity = 0.065789 + 0.08

Cost of new equity = 0.145789

Cost of new equity = 14.58%

(d) Weighted Average Cost of Capital (WACC):

The problem states that the capital structure is 55% equity and 45% debt.

WACC = (Weight of Equity * Cost of Equity) + (Weight of Debt * After-tax Cost of Debt)

WACC = (0.55 * 0.1458) + (0.45 * 0.04794)

WACC = 0.08019 + 0.021573

WACC = 0.101763

WACC = 10.18%

3. Final Answer

The firm's before-tax cost of debt is 7.99%.

The firm's after-tax cost of debt is 4.79%.

The firm's cost of a new issue of common stock is 14.58%.

The weighted average cost of capital is 10.18%.