Question

Compute the cost of the​ following:

a. A bond that has ​$1000 par value​ (face value) and a contract or coupon interest rate of 11 percent. A new issue would have a floatation cost of 6 percent of the ​$1125 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 ​$1.50 dividend last year. The par value of the stock is​ $15, and earnings per share have grown at a rate of 7 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 ​$31​, 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 ​$3.00​, increasing thereafter at an annual growth rate of 11 percent. The​ corporation's tax rate is 32 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 12 percent of the current price of ​$175. e. A bond selling to yield 12 percent after flotation​ costs, but before adjusting for the marginal corporate tax rate of 32 percent. In other​ words, 12 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? ​% ​(Round to two decimal​ places.)

e. What is the​ after-tax cost of debt on the​ bond? % ​(Round to two decimal​ places.)

Answer 1