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Compute the cost for the following sources of financing for Houston Company: A $1,000 face value bond with a market price of $870 and a
Compute the cost for the following sources of financing for Houston Company:
- A $1,000 face value bond with a market price of $870 and a coupon interest rate of 10 percent. Floatation costs for new issue would be approximately 5 percent. The bonds mature in 10 years and the corporate Tax rate is 21 percent.
- A preferred stock selling for $100 with an annual dividend payment of $5. The floatation cost will be $9 per share. The companys marginal tax rate is 21 percent.
- Internally generated common stock totaling $4.8 million. The price of the common stock is $95 per share, and the dividend per share was $9.80 last year. The dividend is not expected to change in the future.
- New common stock when the most recent dividend was $3.80. The companys dividends per share should continue to increase at an 8 percent growth rate into the indefinite future. The market price of the stock is currently $53; however, floatation costs of $6 per share are expected if the new stock is issued.
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