Compute the cost for the following sources of financing:
a. A $ 1,000 par value bond with a market price of $ 970 and a coupon interest rate of 10 percent. Flotation costs for a new issue would be approximately 5 percent. The bonds mature in 10 years and the corporate tax rate is 34 percent.
b. A preferred stock selling for $ 100 with an annual dividend payment of $ 8. The flotation cost will be $ 9 per share. The company’s marginal tax rate is 30 percent.
c. Retained earnings totaling $ 4.8 million. The price of the common stock is $ 75 per share, and dividend per share was $ 9.80 last year. The dividend is not expected to change in the future.
d. New common stock when the most recent dividend was $ 2.80. The company’s dividends per share should continue to increase at an 8 percent growth rate into the indefinite future. The market price of the stock is currently $ 53; however, flotation costs of $ 6 per share are expected if the new stock is issued.

  • CreatedSeptember 11, 2015
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