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2008-07-12_170218_Finance

# 2008-07-12_170218_Finance - = 6.53 b A new common stock...

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Individual or component costs of capital) Compute the cost of the following: a). A bond that has \$1,000 par value (face value0 and a contract or coupon interest rate of 11 percent. A new issue would have a flotation cost of 5 percent of the \$1,125 market value. The bond matures in 10 years. The firm's average tax rate is 30 percent and its marginal tax rate is 34 percent. Net price after flotation costs = \$1,125 (1 - .05) = \$1,068.75 \$1,068.7= = + 10 1 t t d ) k (1 \$110 + 10 d ) k (1 000 , 1 \$ + k d = 9.89% debt of cost tax After - = k d (1 - T) = 9.9%(1-.34)
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Unformatted text preview: = 6.53% b). A new common stock issue that paid a \$1.80 dividend last year. The par value of the stock is \$15, and earnings per share have grown at a rate of 7 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend-earnings ratio of 30 percent. The price of this stock is now \$27.50, but 5 percent flotation costs are anticipated. k ncs = NP 1 D + g = ) 05 . 1 ( 50 . 27 \$ ) 07 . 1 ( 80 . 1 \$-+ + .07 = 0.1437 = 14.37%...
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