1. If a corporation has an average tax rate of 40 percent, issues a debt of 5-year, 8 percent coupon, $1,000 par value bond. In order to sell the issue, the bonds must be underpriced at a discount of 2.5 percent of face value. In addition, the firm would have to pay flotation costs of 2.5 percent of face value. Calculate

a) before-tax cost of debt

b) after-tax cost of debt

2. A firm has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of the preferred stock is