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ALTERNATIVE PROBLEMS AND SOLUTIONS
ALTERNATIVE PROBLEMS
11- 1A. (Individual or Component Costs of Capital) Compute the cost for the following sources of Financing: a. A bond that has a $1,000 par value (face value) and a contract or coupon interior rate of 12%. A new issue would have a flotation cost of 6% of the $1,125 market value. The bonds mature in 10 years. The firm’s average tax rate is 30% and its marginal tax rate is 34%. b. A new common stock issue that paid a $1.75 dividend last year. The par value of the stock is $15, and earnings per share have grown at a rate of 8% per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend/earnings ratio of 30%. The price of this stock is now $28, but 5% flotation costs are anticipated. c. Internal common equity where the current market price of the common stock is $43.50. The expected dividend this coming year should be $3.25, increasing thereafter at a 7% annual growth rate. The corporation’s tax rate is 34%. d. A preferred stock paying a 10% dividend on a $125 par value. If a new issue is offered, flotation costs will be 12% of the current price of $150. e. A bond selling to yield 13% after flotation costs, but prior to adjusting for the marginal corporate tax rate of 34%. In other words, 13% is the rate that equates the net proceeds from the bond with the present value of the future cash flows (principal and interest).
11- 2A. (Individual or Component Costs of Capital) Compute the cost for the following sources of financing: a. A bond selling to yield 9% after flotation costs, but prior to adjusting for the marginal corporate tax rate of 34%. In other words, 9% is the rate that equates the net proceeds from the bond with the present value of the future flows (principal and interest). b. A new common stock issue that

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