IBCs financial manager has recently reviewed the companys capital expenditure processes and set a policy to maintain the current capital structure proportions of 35 per cent interest-bearing debt, 15 per cent preference share capital and 50 per cent ordinary share capital for at least the next three years. The tax rate is 28%.

FINANCING COST DATA

Interest-bearing debt The firm can raise additional debt by selling ten-year, $1000, 7 per cent annual interest rate bonds to net $860 after flotation costs.

Preference shares Preference shares, regardless of the amount sold, can be issued for $60 with a 15 per cent annual dividend rate, and will net $45 per share after flotation costs.

Ordinary Shares The current year ordinary dividend per share is $1.75. The firm expects its dividends and earnings to continue to grow at a constant rate of 12 per cent per year. The firm can sell new ordinary shares, regardless of the amount sold, at $15 per share after flotation costs.

(a) Calculate the after-tax cost of each of the following sources of IBCs current financing:

(ii) Cost of preference shares