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 6 percent. A new issue would have a floatation cost of 7percent of the ​$1,130 market value. The bonds mature in 6 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 ​$1.80 dividend last year. The par value of the stock is​ $15, and earnings per share have grown at a rate of 9 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 ​$32​, but 8 percent flotation costs are anticipated.
c. Internal common equity when the current market price of the common stock is ​$49. The expected dividend this coming year should be ​$3.50​, 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 ​$140 par value. If a new issue is​ offered, flotation costs will be 14 percent of the current price of ​$175.
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).

a. What is the firm's after-tax cost of debt on the bond?

____% (Round to two decimal places)

b. What is the cost of external common equity?

____% (round to two decimal places)

c. What is the cost of internal common equity?

____% (Round to two decimal places)

d. What is the cost of capital for the preferred stock?

____%

e. What is the after-tax cost of debt on the bond?

____%

Answer 1