TABLE 3

Financing Cost Data

Long-term debt: The firm can raise $700,000 of additional debt by selling 10-year, $1,000, 12% annual interest rate bonds to net $970 after flotation costs. Any debt in excess of $700,000 will have a before-tax cost, rd, of 18%.

Preferred stock: Preferred stock, regardless of the amount sold, can be issued with a $60 par value and a 17% annual dividend rate. It will net $57 per share after flotation costs.

Common stock equity: The firm expects its dividends and earnings to continue to grow at a constant rate of 15% per year. The firms stock is currently selling for $20 per share. The firm expects to have $1,300,000 of available retained earnings. Once the retained earnings have been exhausted, the firm can raise additional funds by selling new common stock, netting $16 per share after underpricing and flotation costs.

TO DO

a. Over the relevant ranges noted in the following table, calculate the after-tax cost of each source of financing needed to complete the table.

Source of capital	Range of new financing	After-tax cost (%)
Long-term debt	$0$700,000	_________
	$700,000 and above	_________
Preferred stock	$0 and above	_________
Common stock equity	$0$1,300,000	_________
	$1,300,000 and above	_________