(Individual or component costs of capital) Compute the costs 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 of market price. The bonds mature in 10 years, and the marginal 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 is $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 for which the most recent dividend was $2.80. The company’s dividends per share should continue to increase at an 8 percent growth rate into the indefinite future. The market price of the stock is currently $53; however, flotation costs of $6 per share are expected if the new stock is issued.
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