Question

​(Individual

or component costs of

capital​)

Compute the cost of the​ following:

a. A bond that has

​$1000

par value​ (face value) and a contract or coupon interest rate of

6

percent. A new issue would have a floatation cost of

7

percent of the

​$1,130

market value. The bonds mature in

9

years. The​ firm's average tax rate is 30 percent and its marginal tax rate is

32

percent.

b. A new common stock issue that paid a

​$1.70

dividend last year. The par value of the stock is​ $15, and earnings per share have grown at a rate of

11

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

​$28​,

but

8

percent flotation costs are anticipated.

c. Internal common equity when the current market price of the common stock is

​$48.

The expected dividend this coming year should be

​$3.30

increasing thereafter at an annual growth rate of

9

percent. The​ corporation's tax rate is

32

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

9

percent of the current price of

​$165165.

e. A bond selling to yield

1111

percent after flotation​ costs, but before adjusting for the marginal corporate tax rate of

32

percent. In other​ words,

11

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