In: Finance
a. A bond that has $1 comma 000 par value (face value) and a
contract or coupon interest rate of 6 percent. A new issue would
have a floatation cost of 8 percent of the $1 comma 150 market
value. The bonds mature in 13 years. The firm's average tax rate
is 30 percent and its marginal tax rate is 33 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 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 $29, but 7 percent flotation costs are
anticipated.
c. Internal common equity when the current market price of the
common stock is $45. The expected dividend this coming year should
be $3.20, increasing thereafter at an annual growth rate of 7
percent. The corporation's tax rate is 33 percent.
d. A preferred stock paying a dividend of 9 percent on a $120 par
value. If a new issue is offered, flotation costs will be 12
percent of the current price of $179.
e. A bond selling to yield 13 percent after flotation costs, but
before adjusting for the marginal corporate tax rate of 33 percent.
In other words, 13 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?
b. What is the cost of external common equity?
c. What is the cost of internal common equity?
d. What is the cost of capital for the preferred stock?
e. What is the after-tax cost of debt on the bond?