9-2. (Individual or component costs of capital) Compute the cost of the following:
a. A bond that has $1,000 par value (face value) and a contract or coupon interest
rate of 9 percent. A new issue would have a flotation cost of 5 percent of the
$1,100 market value. The bonds mature in 10 years. The firm’s average tax rate
is 30 percent, and its marginal tax rate is 21 percent.
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 (as a percent of
market price) are anticipated. c. Internal common equity when the current market price of the common stock
is $43. The expected dividend this coming year should be $3.50, increasing
thereafter at a 7 percent annual growth rate. The corporation’s tax rate is
21!percent.
d. A preferred stock paying a 9 percent dividend on a $150 par value. If a new
issue is offered, flotation costs will be 12 percent of the current price of $175.
e. A bond selling to yield 12 percent after flotation costs, but before adjusting for
the marginal corporate tax rate of 21 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 (principal and interest). There is not additional information, solve it!