?(Individual

or component costs of

capital?)

Compute the cost of the? following:

a. A bond that has

?$1000

par value? (face value) and a contract or coupon interest rateof

6

percent. A new issue would have a floatation cost of

7

percent of the

?$1,130

market value. The bonds mature in

9

years. The? firm's average tax rate is 30 percent and itsmarginal tax rate is

32

percent.

b. A new common stock issue that paid a

?$1.70

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

11

percent per year. This growth rate is expected to continue intothe foreseeable future. The company maintains a constant?dividend-earnings ratio of 30 percent. The price of this stock isnow

?$28?,

but

8

percent flotation costs are anticipated.

c. Internal common equity when the current market price of thecommon stock is

?$48.

The expected dividend this coming year should be

?$3.30

increasing thereafter at an annual growth rate of

9

percent. The? corporation's tax rate is

32

percent.

d. A preferred stock paying a dividend of

9

percent on a

?$140

par value. If a new issue is? offered, flotation costs willbe

9

percent of the current price of

?$165165.

e. A bond selling to yield

1111

percent after flotation? costs, but before adjusting for themarginal corporate tax rate of

32

percent. In other? words,

11

percent is the rate that equates the net proceeds from the bondwith the present value of the future cash flows? (principal and?interest).