Reference no: EM132776033

Question - Cost of different sources of capital financing

1. Using the cost of debt approximation formula, determine the pre-tax cost for a bond that sells at $ 925 par value and pays a coupon of $ 85 for 20 years. The flotation costs are $ 5 per bond. You must show the calculations to receive a score for your answer.

2. For the case in the previous problem, calculate the cost of debt after taxes if the company's tax liability is 40%. You must show the calculations to receive a score for your answer.

3. Consider issuing preferred shares with an annual dividend of $ 12.00 per preferred share. These shares will sell for $ 100 each. The cost of issuance (flotation cost) is $ 8 per share. Calculate the cost of preferred capital. You must show the calculations to receive a score for your answer.

4. The DupT corporation plans to do common stock issue to fund its next equity investment project. The market price of the corporation's stock is $ 75 per share. A dividend of $ 5 per share is expected to be paid at the end of the year. The corporation has had an average annual growth of 6%. The issue cost is $ 2.50 per share. Determine the cost of equity capital using Gordon's constant growth method (Gordon Growth Model). You must show the computations to receive credit for your answer.