Question content area top

Part $1$

$($Individual

or component costs of

capital$)$

Compute the costs for the following sources of$$ financing:

a$.$ A

$ $1$ comma $000$$$1,000$

par value bond with a market price of

$ $940$$$940$

and a coupon interest rate of

$99$

percent. Flotation costs for a new issue would be approximately

$55$

percent. The bonds mature in

$1313$

years and the corporate tax rate is

$2525$

percent.

b$.$ A preferred stock selling for

$ $117$$$117$

with an annual dividend payment of

$ $9$$$9.$

The flotation cost will be

$ $7$$$7$

per share. The$$ company's marginal tax rate is

$2525$

percent.

c$.$ Retained earnings totaling

$ $4\mathrm{.}8$$$4\mathrm{.}8$

million. The price of the common stock is

$ $81$$$81$

per$$ share, and dividend per share was

$ $8\mathrm{.}08$$$8\mathrm{.}08$

last year. The dividend is not expected to change in the future.

d$.$ New common stock for which the most recent dividend was

$ $2\mathrm{.}69$$$2\mathrm{.}69.$

The$$ company's dividends per share should continue to increase at a growth rate of

$88$

percent into the indefinite future. The market price of the stock is currently

$ $64$$$64$;

$$however$,$ flotation costs of

$ $6$$$6$

per share are expected if the new stock is issued.

Question content area bottom

Part $1$

a$.$ What is the$$ firm's after$-$tax cost of debt on the$$ bond?

$7\mathrm{.}917\mathrm{.}91\%$

$($Round to two decimal$$ places.$)$

Part $2$

b$.$ What is the cost of capital for the preferred$$ stock?

enter your response here$\%$

$($Round to two decimal$$ places.$)$