a. A $1,000 par value bond with a market price of $ 940 and a coupon interest ra

Question

a. A $1,000 par value bond with a market price of $ 940 and a coupon interest rate of 12 percent. Flotation costs for a new issue would be approximately 7 percent. The bonds mature in 13 years and the corporate tax rate is 32 percent.

b. A preferred stock selling for $ 116 with an annual dividend payment of $ 8. The flotation cost will be $ 5per share. The company's marginal tax rate is 30 percent.

c. Retained earnings totaling $ 4.8 million. The price of the common stock is $ 75 per share, and dividend per share was $ 8.81 last year. The dividend is not expected to change in the future.

d. New common stock for which the most recent dividend was $ 2.71. The company's dividends per share should continue to increase at a growth rate of 11 percent into the indefinite future. The market price of the stock is currently $ 64; however, flotation costs of $7 per share are expected if the new stock is issued.

Explanation / Answer

Solution.

Calculation for firm's after-tax cost of debt on the bond.

Coupon interest rate of 12 percent.

Corporate tax rate is 32 percent

After tax cost of debt = 12% x ( 1 - .32 )0.68 = 8.16%.

Flotation cost is a one time expense so we dont includeing here.

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