Reference no: EM133067745
-Nova Inc. is interested in measuring its overall cost of capital. The tax rate of the firm is currently 40%. The needed financial information and data are as follows:Debt: Nova can raise debt by selling $1,000-par-value, 6.5% coupon interest rate, 10-year bonds on which annual interest payments will be made. Since the market interest is higher than the coupon rate, to sell the issue, an average discount of $20 per bond needs to be given. There is an associated flotation cost of 2% of par value.
Preferred stock: Preferred stock can be sold under the following terms: The security has a par value of $100 per share, the annual dividend rate is 6% of the par value, and the flotation cost is expected to be $4 per share. The preferred stock is expected to sell for $102 before cost considerations.
Common stock: The current price of Nova's common stock is $35 per share. The cash dividend is expected to be $3.25 per share next year. The firm's dividends have grown at an annual rate of 5%, and it is expected that the dividend will continue at this rate for the foreseeable future. The flotation costs are expected to be approximately $2 per share. Nova can sell new common stock under these terms.
Retained earnings: The firm expects to have available $100,000 of retained earnings in the coming year. Once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.
The market value of the long-term debt is $1,767,500, preferred stock is $1,414,000 and common stock equity valued to $1,868,500.
a. Calculate the after-tax cost of debt
b. Calculate the cost of preferred stock
c. Calculate the cost of new common stock
Give your answer in percentage upto two decimal point
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