For capital budgeting purposes, the marginal cost of each capital source needs to be calculated.

a. The after-tax cost of debt is equal to the pretax cost of new debt times one minus the firm’s marginal tax rate.

b. The after-tax cost of a perpetual preferred stock is equal to the annual dividend divided by the net proceeds to the firm from the sale of preferred stock.

c. The cost of internal equity capital can be computed using a version of the dividend valuation model, the capital asset pricing model, or a risk-premium-over-debt approach.

d. The cost of external equity capital exceeds the cost of internal equity capital by the amount of the issuance costs.  LO1