Question

(Individual or Component Costs of Capital) Compute the cost for the following
sources of Financing:
a. A bond that has a $1,000 par value (face value) and a contract or coupon
interior rate of 12%. A new issue would have a flotation cost of 6% of the
$1,125 market value. The bonds mature in 10 years. The firm’s average tax
rate is 30% and its marginal tax rate is 34%.
b. A new common stock issue paid a $1.75 dividend last year. The par value of
the stock is $15, and earnings per share have grown at a rate of 8% per year.
This growth rate is expected to continue into the foreseeable future. The
company maintains a constant dividend/earnings ratio of 30%. The price of
this stock is now $28, but 5% flotation costs are anticipated.
c. Internal common equity where the current market price of the common stock
is $43.50. The expected dividend this coming year should be $3.25,
increasing thereafter at a 7% annual growth rate. The corporation’s tax rate is
34%.
d. A preferred stock paying a 10% dividend on a $125 par value. If a new issue
is offered, flotation costs will be 12% of the current price of $150.

Answer 1