12-2B. (Individual or component costs ofcapital) Compute the cost of the following:

a. A bond selling to yield 9 percent after flotation costs, but prior to adjusting for the marginal corporate tax rate of 34 percent. In other words, 9 percent is the rate that equates the net proceeds ftom the bond with the present value of the future flows (principal and interest).

b. Anew common stock issue that paid a $1.25 dividend last year. The par value of the stock is $2, and the earnings per share have grown at a rate of 6 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant diVidend/earnings ratio of 40 percent. The price of this stock is now $30, but 9 percent flotation costs are anticipated.

c. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 13 percent. A new issue would net the company 90 percent of the $1,125 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 $125 par value. If a new issue is offered, the company can expect to net $90 per share.

e. Internal common equity where the current market price of the common stock is $38.
The expected dividend this coming year should be $4, increasing thereafter at a 5 percent annual gTOwth rate. This corporation's tax rate is 34 percent.