Determine what is the cost of external common? equity

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Compute the cost of the? following:

Point a. A bond that has ?$1,000 par value? (face value) and a contract or coupon interest rate of 7 percent. A new issue would have a floatation cost of 7 percent of the ?$1,115 market value. The bonds mature in 8 years. The? firm's average tax rate is 30 percent and its marginal tax rate is 33 percent.

Point b. A new common stock issue that paid a ?$11.50 dividend last year. The par value of the stock is? $15, and earnings per share have grown at a rate of 9 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 ?$23?, but 8 percent flotation costs are anticipated.

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

Question b. What is the cost of external common? equity?

Reference no: EM132488593

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