P9-2 Cost of debt using both methods Currently, Warren Industries can sell 15-year, $1,000-par-value bonds paying annual interest at a 12% coupon rate. As a result of current interest rates, the bonds can be sold for $1,010 each; flotation costs of $30 per bond will be incurred in this process. The firm is in the 40% tax bracket. a. Find the net proceeds from sale of the bond, Nd. b. Show the cash flows from the firm's point of view over the maturity of the bond. c. Calculate the before-tax and after-tax costs of debt. d. Use the approximation formula to estimate the before-tax and after-tax costs of debt. e. Compare and contrast the costs of debt calculated in parts c and d. Which ap- proach do you prefer? Why? P9-7 Cost of preferred stock Mavis Taylor Corporation has just issued preferred stock. The stock has a 6% annual dividend and a $100 par value, and was sold at $98.5 per share. Flotation costs were an additional $3 per share. a. Calculate the cost of the preferred stock. b. If the firm sells the preferred stock with a 10% annual dividend and net $93.00 after flotation costs, what is its cost? P9-10 Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity. The firm's stock is currently selling for $57.50. The firm expects to pay a $3.40 dividend at the end of the year (2016). The dividends for the past 5 years are shown in the following table. Year Dividend 2015 $3.10 2014 2.92 2013 2.60 2012 2.30 2011 2.12 After underpricing and flotation costs, the firm expects to net $52 per share on a new issue. a. Determine the growth rate of dividends from 2011 to 2015. b. Determine the net proceeds, N,,, that the firm will actually receive. c. Using the constant-growth valuation model, determine the cost of retained earnings, r,. d. Using the constant-growth valuation model, determine the cost of new common stock, T- P9-12 The effect of tax rate on WACC Smart Finance Corporation wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The company wishes to maintain a capital structure of 30% debt, 10% preferred stock, and 60% common stock. The cost of financing with equity is 12%, the cost of preferred stock financing is 7%, and the before-tax cost of debt financing is 5%. Calculate the weighted average cost of capital (WACC) given the tax rate assumptions in parts a to c. a. Tax rate b. Tax rate 50% 40% c. Tax rate 30% d. Describe the relationship between changes in the taxation rate and the weighted average cost of capital.