A firm has determined its optimal structure which is composed of the following sources and target market value proportions.
Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of $50.
Common Stock: A firm's common stock is currently selling for $75 per share. The dividend expected to be paid at the end of the coming year is $5. Its dividend payments have been growing at a constant rate for the last five years. Five years ago the dividend was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent.
1) The firm's before-tax cost of debt is ________.
A) 7.7 percent B) 11.2 percent C) 12.7 percent D) 10.6 percent
2) The firm's after-tax cost of debt is ________.
A) 7.7 percent B) 7 percent C) 6 percent D) 4.6 percent
3) The firm's cost of a new issue of common stock is ________.
A) 16.7 percent B) 10.2 percent C) 14.3 percent D) 17.0 percent