and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis' cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task: The firm's tax rate is 35%. . Bond price DO The current price of Harry Davis' 12.5% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $. Harry Davis does not use short-term interest- bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. The current price of the firm's 10%, $100 par value, quarterly dividend, perpetual preferred stock is S. Harry Davis would incur flotation costs equal to 6% of the proceeds on a new issue. Harry Davis' common stock is currently selling at $70 per share. Its last dividend (DO) was S, and dividends are expected to grow at a constant rate of 5.8% in the foreseeable future. Harry Davis' beta is 1.4, the yield on T-bonds is 5.6%, and the market risk premium is estimated to be 6%. For the own-bond-yield-plus-judgmental- risk-premium approach, the firm uses a 3.2% risk premium. Harry Davis' target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity. Group 1 1155.70 Preferred 116.50 Stock price 2.88 Group 2 1152.55 110.23 3.02 Group 3 1150.25 107.54 3.12 Group 4 1145.77 109.57 3.31 Group 5 1158.36 118.11 3.22 Group 6 1122.65 113.15 3.40 Group 7 1105.67 114.27 3.29 1. Harry Davis is interested in establishing a new division that will focus primarily on developing new Internet-based projects. In trying to determine the cost of capital for this new division, you discover that specialized firms involved in similar projects have, on average, the following characteristics: (1) their capital structure is 15% debt and 85% common equity. (2) their cost of debt is typically 12%, and (3) they have a beta of 1.75. Given this information, what would your estimate be for the new division's cost of capital? m. What are three types of project risk? How can each type of risk be considered when thinking about the new division's cost of capital? n. (1) Harry Davis estimates that if it issues new common stock, the flotation cost will be 12.5%. Harry Davis incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, taking into account the flotation cost? (2) Suppose Harry Davis issues 30-year debt with a par value of $1,000 and a coupon rate of 10%, paid annually. If flotation costs are 3%, what is the after-tax cost of debt for the new bond issue? and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis' cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task: The firm's tax rate is 35%. . Bond price DO The current price of Harry Davis' 12.5% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $. Harry Davis does not use short-term interest- bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. The current price of the firm's 10%, $100 par value, quarterly dividend, perpetual preferred stock is S. Harry Davis would incur flotation costs equal to 6% of the proceeds on a new issue. Harry Davis' common stock is currently selling at $70 per share. Its last dividend (DO) was S, and dividends are expected to grow at a constant rate of 5.8% in the foreseeable future. Harry Davis' beta is 1.4, the yield on T-bonds is 5.6%, and the market risk premium is estimated to be 6%. For the own-bond-yield-plus-judgmental- risk-premium approach, the firm uses a 3.2% risk premium. Harry Davis' target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity. Group 1 1155.70 Preferred 116.50 Stock price 2.88 Group 2 1152.55 110.23 3.02 Group 3 1150.25 107.54 3.12 Group 4 1145.77 109.57 3.31 Group 5 1158.36 118.11 3.22 Group 6 1122.65 113.15 3.40 Group 7 1105.67 114.27 3.29 1. Harry Davis is interested in establishing a new division that will focus primarily on developing new Internet-based projects. In trying to determine the cost of capital for this new division, you discover that specialized firms involved in similar projects have, on average, the following characteristics: (1) their capital structure is 15% debt and 85% common equity. (2) their cost of debt is typically 12%, and (3) they have a beta of 1.75. Given this information, what would your estimate be for the new division's cost of capital? m. What are three types of project risk? How can each type of risk be considered when thinking about the new division's cost of capital? n. (1) Harry Davis estimates that if it issues new common stock, the flotation cost will be 12.5%. Harry Davis incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, taking into account the flotation cost? (2) Suppose Harry Davis issues 30-year debt with a par value of $1,000 and a coupon rate of 10%, paid annually. If flotation costs are 3%, what is the after-tax cost of debt for the new bond issue