(Individual or component costs of capital) Compute the cost for the following:
c. A bond that has a $1,000 par value and a contract or coupon interest rate of 12 percent. A new issue would net the company 90 percent of the $1,150 market value. The bonds mature in 20 years, the firm’s average tax rate is 30 percent, and its marginal tax rate is 34 percent.
d. A preferred stock paying a 7 percent dividend on a $100 par value. If a new issue is offered, the company can expect to net $85 per share. Internal common equity where the current market price of the common stock is $38. The expected dividend this forthcoming year should be $3, increasing thereafter at a 4 percent annual growth rate. The corporation’s tax rate is 34 percent.
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e is just the cost of equity capital. It is part of d only. Remove e and you are good to go.