1. Global Products plans to issue long-term bonds to raise funds to finance its growth. The company has existing bonds outstanding that are similar to the new bonds it expects to issue. The existing bonds have a face value equal to $1,000, mature in 10 years, pay $60 interest annually, and are currently selling for $1,077 each. Global's marginal tax rate is 40 percent. (a) What should be the coupon rate on the new bond issue? (b) What is Global's after-tax cost of debt?
2. Buoyant Cruises plans to issue preferred stock with a $120 par value and a 5 percent dividend. Even though the current market value of its preferred stock is $80 per share, Buoyant expects to net only $75 for each share issued. What is its cost of issuing preferred stock? The firm's marginal tax rate is 34 percent.
3. Suppose the current risk-free rate of return is 3.5 percent and the expected market return is 9 percent. Fashion Faux-Pas' common stock has a beta coefficient equal to 1.4. Using the CAPM approach, compute the firm's cost of retained earnings.
4. Suppose the current risk-free rate of return is 5 percent and the expected market risk premium is 7 percent. Using this information, estimate the cost of retained earnings for a company with a beta coefficient equal to 2.0?
5. Futuristic Coiffures (FC) needs to raise $85,000 to purchase a new machine. FC knows its component costs of capital are rd=5%, rps=7%, rs=11%, and re=13%. FC maintains a capital structure that consists of 60 percent debt, 10 percent preferred stock, and 30 percent common equity. The firm's marginal tax rate is 30 percent. If FC expects to generate $27,000 in retained earnings this year, what marginal cost of capital will it incur to raise the needed funds?