Question

​(Individual or component costs of capital​) Compute the cost of the​ following:

a. A bond that has ​$1,000 par value​ (face value) and a contract or coupon interest rate of 8 percent. A new issue would have a floatation cost of 8 percent of the ​$1,140 market value. The bonds mature in 11 years. The​ firm's average tax rate is 30 percent and its marginal tax rate is 36 percent.

b. A new common stock issue that paid a ​$1.60 dividend last year. The par value of the stock is​ $15, and earnings per share have grown at a rate of 12 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant​ dividend-earnings ratio of 30 percent. The price of this stock is now ​$23​, but 7 percent flotation costs are anticipated.

c. Internal common equity when the current market price of the common stock is ​$43. The expected dividend this coming year should be ​$3.00​, increasing thereafter at an annual growth rate of 9 percent. The​ corporation's tax rate is 36 percent.

d. A preferred stock paying a dividend of 9 percent on a ​$100 par value. If a new issue is​ offered, flotation costs will be 13 percent of the current price of ​$169.

e. A bond selling to yield 9 percent after flotation​ costs, but before adjusting for the marginal corporate tax rate of 36 percent. In other​ words, 9 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows​ (principal and​ interest).

Answer 1

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