Task: Compute the cost of the following:
A. A bond is selling to yield 7 percent after flotation costs, but before adjusting for the marginal corporate tax rate of 34 percent. In other words, 7 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows (principle and interest).
B. A new common stock issue paid a $1.05 dividend last year. The par value of the stock is $2.00 and the earnings per share have grown at a rate of 4 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend-earnings ratio of 40 percent. The price of this stock is now $30, but 9 percent flotation costs are anticipated.
C. A bond that has a $ 1000 par value and a contract, or coupon, interest rate of 12 percent. A new issue would net the company 90 percent of the $1,150 market value. The bonds mature in 15 years, the firm's average average tax rate is 30 percent, and its marginal tax rate is 34 percent.
D. A preferred stock paying a 6 percent dividend on a $100 par value. If a new issue is offered, the company can expect to net $85 per share.
E. Internal common equity when the current market price of the common stock is $35.00. The expected dividend this coming year should be $4.00, increasing thereafter at a 4 percent annual growth rate. The corporation's tax rate is 34 percent.