9-2. (Individual or component costs of capital) Compute the cost of the following:

a. A government bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 8 percent. A new issue would have a flotation cost of 4 percent of the $1,150 market value. The bonds mature in 11 years. The firms average tax rate is 24 percent, and its marginal tax rate is 21 percent.

b. A new common stock issued by LVMH paid a $2 dividend last year. The par value of the stock is $16, and earnings per share have grown at a rate of 8 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividendearnings ratio of 34 percent. The price of this stock is now $28.70, but 4 percent flotation costs (as a percent of market price) are anticipated.

c. Internal common equity when the current market price of LVMH common stock is $45. The expected dividend this coming year should be $3.70, increasing thereafter at a 5 percent annual growth rate. LVMHs corporate tax rate is 24 percent.

d. LVMH has a preferred stock paying an 8 percent dividend on a $180 par value. If a new issue is offered, flotation costs will be 14 percent of the current price of $190.

e. Another LVMH bond selling to yield 14 percent after flotation costs, but before adjusting for the marginal corporate tax rate of 24 percent. In other words, 14 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows (principal and interest).