Calculate cost of debt?

For the Surfaces Division, MDFA only has one publicly-traded North American company for comparison. Dura Surface Ltd. has been in existence for 30 years selling road and sidewalk surfacing machinery. Exhibit 1 provides share prices for Dura Surface and national stock index values for the last five years. Dura Surface issues bonds to finance its operations, which currently trade at 101.11 and have a coupon rate of 5.31 percent and a term of 15 years.

Due to its strong financial position, MDFA is able to raise new capital inexpensively. The cost of issuing new equity is 5 percent and the cost of raising debt is 1.5 percent. Company policy is not to include issuance costs in the costs of capital, but to show it as a cash outflow in all NPV analyses. Retained earnings are used instead of new equity to fund growth to avoid control problems.

The interest rate on the 20-year Government of Canada bond is currently 4.0 percent and the market risk premium is 5.5 percent. MDFA has a marginal tax rate of 25 percent and a long-term debt to total capitalization ratio of 35 percent which approximates the companys target capital structure.