Flotation costs for new issue

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Reference no: EM13919817

Compute the cost for the following sources of financing:

a. A $1,000 par value bond with a market price of $970 and a coupon interest rate of 10 percent. Flotation costs for a new issue would be approximately 5 percent. The bonds mature in 10 years and the corporate tax rate is 34 percent.

b. A preferred stock selling for $100 with an annual dividend payment of $8. The flotation cost will be $9 per share. The company’s marginal tax rate is 30 percent.

c. Retained earnings totaling $4.8 million. The price of the common stock $75 per share, and dividend per share was $9.80 last year. The dividend is not expected to change in the future.

d. New common stock when the most recent dividend was $2.80. The company’s dividends per share should continue to increase at an a8 percent growth rate into the indefinite future. The market price of the stock is currently $53; however, flotation costs of $6b per share are expected if the new stock is issued.

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Reference no: EM13919817

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