Individual or component costs of capital) Compute the cost of the following:
a). A bond that has $1,000 par value (face value0 and a contract or coupon interest rate of 11 percent. A new issue would have a flotation cost of 5 percent of the $1,125 market value. The bond matures in 10 years. The firm’s average tax rate is 30 percent and its marginal tax rate is 34 percent.
b). A new common stock issue that paid a $1.80 dividend last year. The par value of the stock is $15, and earnings per share have grown at a rate of 7 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 $27.50, but 5 percent flotation costs are anticipated.
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