Hollydale’s will issue an additional 5,000 bonds with the help of an investment banker. The bonds will be semiannual bonds with thirty years to maturity. The coupon rate will be 8% and the par value $1,000. These bonds will be sold at $851.86 in the market, but the investment banker will receive a 4% commission on the sold bonds. The original bonds have 16 years to maturity and are semiannual, with a coupon rate of 7.5% and a price of $874.08. There are 10,000 bonds outstanding with this senior issue. What is the new cost of capital for Hollydale’s if the company still has 500,000 shares outstanding selling at $21.25 with an annual dividend growth rate of 2% and the last annual dividend of $2.50? The tax rate remains at 35%.
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