(Individual or component cost of capital) Compute the cost of the following:
a. A bond that has $1000 par value (face value) and a contract or coupon interest rate of 7 percent. A new issue would have a floatation cost of 7 percent of the $1,150 market value. The bonds mature in 15 years. The firm's average tax rate is 30 percent and its marginal tax rate is 32 percent.
b. A new common stock issue that paid a $1.40 dividend last year. The par value of the stock is $15 and earnings per share have grown at a rate of 8 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 stock is now $28, but 6 percent floatation costs are anticipated.
c. Internal common equity when the current market price of the common stock is$46. The expected dividend this coming year should be $3.60, increasing thereafter at an annual growth rate of 7 percent. The corporation's tax rate is 32 percent.
d. A preferred stock paying a dividend of 9 percent on a $100 par value if a new issue is offered, floatation costs will be 14 percent of the current price of $171.
e. A bond selling to yield 12 percent after floatation costs, but before adjusting for the marginal corporate tax rate of 32 percent. In other words, 12 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows (principle and interest).
a. What is the firm's after-tax cost of debt on the bond?
b. What is the cost of external common equity?
c. What is the cost of the internal common equity?
d. What is the cost of capital for the preferred stock?
e. What is the after-tax cost of debt on the bond?