Question

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 7 percent. A new issue would have a floatation cost of 7 percent of the ​$1,120 market value. The bonds mature in 15 years. The​ firm's average tax rate is 30 percent and its marginal tax rate is 22 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 ​$23​, but 9 percent flotation costs are anticipated.

c. Internal common equity when the current market price of the common stock is ​$47. The expected dividend this coming year should be ​$3.60​, increasing thereafter at an annual growth rate of 9 percent. The​ corporation's tax rate is 22 percent.

d. A preferred stock paying a dividend of 11 percent on a ​$110 par value. If a new issue is​ offered, flotation costs will be 15 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 22 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).

Answer 1

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