Flotation costs and the cost of debt In March of 2020 PepsiCo, Inc. (PEP) sold $750 million worth of 25-year 4.25% coupon bonds that pay semi-annual interest. At the time the bonds were issued, the market paid $1,008.75 per bond and the flotation cost was $17.04 per bond. Pepsi's corporate tax rate is 21%.

a.Ignoring flotation costs, what is Pepsi's before-tax and after-tax costs of debt?

b.Considering flotation costs, what is Pepsi's before-tax and after-tax costs of debt?

2. Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity. The firm's stock is currently selling for $63.39. The firm just recently paid a dividend of $4.08. The firm has been increasing dividends regularly. Five years ago, the dividend was just $3.04. After underpricing and flotation costs, the firm expects to net $58.95 per share on a new issue.

a.Determine average annual dividend growth rate over the past 5 years. Using that growth rate, what dividend would you expect the company to pay next year?

b. Determine the net proceeds, Nn, that the firm will actually receive.

c.Using the constant-growth valuation model, determine the required return on the company's stock, rs,which should equal the cost of retained earnings, rr.

d.Using the constant-growth valuation model, determine the cost of new common stock, rn.