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. A bond that has

$1,000

par value (face value) and a contract or coupon interest rate of

11

percent. A new issue would have a floatation cost of

7

percent of the

$1,135

market value. The bonds mature in

11

years. The firm's average tax rate is 30 percent and its marginal tax rate is

25

percent.b. A new common stock issue that paid a

$1.50

dividend last year. The par value of the stock is $15, and earnings per share have grown at a rate of

11

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

$25,

but

8

percent flotation costs are anticipated.c. Internal common equity when the current market price of the common stock is

$47.

The expected dividend this coming year should be

$3.00,

increasing thereafter at an annual growth rate of

11

percent. The corporation's tax rate is

25

percent.d. A preferred stock paying a dividend of

8

percent on a

$110

par value. If a new issue is offered, flotation costs will be

13

percent of the current price of

$167.

e. A bond selling to yield

12

percent after flotation costs, but before adjusting for the marginal corporate tax rate of

25

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).

a. What is the firm's after-tax cost of debt on the bond?

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