Although Santona Osmann has some shortterm debt, you know that the company does not use shortterm interestbearing debt on a permanent basis but longterm debt. You have been informed that the current price of Santona Osmanns 9% annual coupon payment, noncallable bonds with 20 years remaining to maturity is $1,211.88, with a face value of $1,000.00. New bonds would be privately placed with no flotation cost.

The firm's marginal tax rate is 35%.

The current price of preferred stocks is $116.95, with annual dividends of 9% of par value,

paid quarterly. The preferred stocks par value is $80. The company would incur flotation costs equal to 5% of the proceeds on a new issue. Assume that in the estimations of the cost of preferred stocks, the company uses the effective cost of preferred stocks.

According to the most recent information, the companys stock is currently selling at $40 per share. Its last dividend (D0) was $2.88. The earnings, dividends, and share price of Santona Osmann are expected to grow at 5.5% per year in the future. Additionally, you have been informed that the companys stock is 10% more volatile than the average stock in the market; the yield on Treasurybonds is 1.8%; and the estimated market risk premium is 7%. Regarding the estimation of the cost of common equity, given the high volatility in the capital markets, the company has decided to compute it as the average between the estimations based on the Discounted Dividend Model (DDM) and the Capital Asset Pricing Model (CAPM).

Regarding the capital structure of the company, you checked out the Balance Sheet and discovered that Santona Osmann has $320 (million) in common equity, and that the total outstanding debt is exactly 2.5 times greater that the common equity, whilst the preferred stocks represent threefifths of the companys common equity.

The treasurer has asked you to answer the following questions:

What is the market interest rate on Santona Osmanns debt, and what is the component costof this debt for WACC purposes?

What is the firm's cost of preferred stock assuming that the company had to issue new preferred stocks?

What is the estimated cost of common equity using the Discounted Dividend Model (DDM)? And the estimated cost using the Capital Asset Pricing Model (CAPM)?

Based on the assumptions given in the case, what is your final estimate of the cost of common equity?

If you compare the cost of preferred stocks and the cost of common stocks, which one would you expect to be higher?

What is the companys weighted average cost of capital (WACC)? How would you interpret this coefficient?

Explain in your own words why new shares that are raised externally have a higher percentage cost than equity that is raised internally by retaining earnings.

Santona Osmann estimates that if it issues new shares the flotation cost will be 8.5%. The company incorporates the flotation cost into the DDM approach. What is the estimated cost of newly issued shares taking into consideration the flotation costs?