(Individual or component costs of capital) Compute the cost of thefollowing:

a. A bond that has $1,000 par value(face value) and a contract or coupon interest rate of 9 percent. A new issue would have a floatation cost of 5 percent of the $1,125 market value. The bonds mature in 14 years. Thefirm's average tax rate is 30 percent and its marginal tax rate is 24 percent.

b. A new common stock issue that paid a $1.70 dividend last year. The par value of the stock is$15, and earnings per share have grown at a rate of 9 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constantdividend-earnings ratio of 30 percent. The price of this stock is now $32, but 6 percent flotation costs are anticipated.

c. Internal common equity when the current market price of the common stock is $44. The expected dividend this coming year should be $3.20, increasing thereafter at an annual growth rate of 11 percent. Thecorporation's tax rate is 24 percent.

d. A preferred stock paying a dividend of 11 percent on a $110 par value. If a new issue isoffered, flotation costs will be 14 percent of the current price of $161.

e. A bond selling to yield 9 percent after flotationcosts, but before adjusting for the marginal corporate tax rate of 24 percent. In otherwords, 9 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows(principal andinterest).

a. What is thefirm's after-tax cost of debt on thebond?

nothing

% (Round to two decimalplaces.)

(Cost of debt) Carraway Seed Company is issuing a $1,000 par value bond that pays 11 percent annual interest and matures in 7 years. Investors are willing to pay $930 for the bond. Flotation costs will be 13 percent of market value. The company is in a 38 percent tax bracket. What will be thefirm's after-tax cost of debt on thebond?

Thefirm's after-tax cost of debt on the bond will be

15.68

15.68%. (Round to two decimalplaces.)

(Divisional costs of capital and investment decisions) In May of thisyear, Newcastle Mfg.Company's capital investment review committee received two major investment proposals. One of the proposals was put forth by thefirm's domestic manufacturingdivision, and the other came from thefirm's distribution company. Both proposals promise a return on invested capital to approximately 14 percent. In thepast, Newcastle has used a singlefirm-wide cost of capital to evaluate new investments.

However, managers have long recognized that the manufacturing division is significantly more risky than the distribution division. Infact, comparable firms in the manufacturing division have equity betas of about 1.8, whereas distribution companies typically have equity betas of only 1.2. Given the size of the twoproposals, Newcastle's management feels it can undertake onlyone, so it wants to be sure that it is taking on the more promising investment. Given the importance of getting the cost of capital estimate as close to correct aspossible, thefirm's chief financial officer has asked you to prepare cost of capital estimates for each of the two divisions. The requisite information needed to accomplish your taskfollows:

The cost of debt financing is 12 percent before a marginal tax rate of 21 percent. You may assume this cost of debt is after any flotation costs the firm might incur.

Therisk-free rate of interest onlong-term U.S. Treasury bonds is currently 5.5 percent, and themarket-risk premium has averaged 4.8 percent over the past several years.

Both divisions adhere to target debt ratios of 60 percent.

The firm has sufficient internally generated funds such that no new stock will have to be sold to raise equity financing.

a. Estimate the divisional costs of capital for the manufacturing and distribution divisions.

b. Which of the two projects should the firm undertake(assuming it cannot do both due to labor and other nonfinancialrestraints)? Discuss.

a. What is the divisional cost of capital for the manufacturingdivision?

nothing

% (Round to two decimalplaces.)