Reference no: EM131750207

Question: A firm can issue bonds with a coupon rate of I 0 percent but only if they are sold at a discount of 2.5 percent, or at 97 .5 percent of face value. Underwriting expenses amount to a further 2 percent of face value. Preferred shares with $25 par value, which can be issued to net 90 percent of par value after all expenses, carry a dividend of $2.00. The firm's common shares currently trade at $30 and a new issue would net the firm $27 per share. Growth in common dividends is anticipated to remain at 6 percent per year indefinitely and the current dividend is $2.50. The firm's tax rate is 40 percent. Compute the cost of capital and market yield for each source of funds.