Question

1. The Cost of Equity and Flotation Costs

Messman Manufacturing will issue common stock to the public for $30. The expected dividend and the growth in dividends are $4.00 per share and 5%, respectively. If the flotation cost is 11% of the issue's gross proceeds, what is the cost of external equity, r_e? Round your answer to two decimal places.

  __%

The Cost of Debt and Flotation Costs.

Suppose a company will issue new 25-year debt with a par value of $1,000 and a coupon rate of 8%, paid annually. The issue price will be $1,000. The tax rate is 25%. If the flotation cost is 3% of the issue proceeds, then what is the after-tax cost of debt? Round your answer to two decimal places.

  __%

What if the flotation costs were 11% of the bond issue? Round your answer to two decimal places.

__ %

Answer 1

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Answer:

= 4/(30*(1-11%))+5% = 19.98%

2)

a) The after-tax cost of debt is calculated using the RATE function as follows:

=RATE(nper,pmt,pv,fv)*(1-tax rate)

=RATE(25,8%*1000,-1000*97%,1000)*(1-25%)

=6.22%

b) When floatation costs is 11%:-

=RATE(25,8%*1000,-1000*89%,1000)*(1-25%)

=6.85%