12-2A. (Individual or crmtponmt costs ofcapital) Compute the cost for the following:

a. A bond selling to yield 8 percent after flotation costs, but prior to adjusting for the marginal corporate tax rate of 34 percent. In other words, 8 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows (principal and interest).

b. A new common stock issue that paid a $1.05 dividend last year. The par value of the stock is $2, and the earnings per share have grown at a rate of 5 percent per year. This growth rate is expected to continue into the foreseeable future. The co~pany maintains a constant dividend-earnings ratio of 40 percent. The price of this stock is now $25, but 9 percent flotation costs are anticipated.

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 ta,x 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.

e. 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.