Problem 9-9

Bond Yield and After-Tax Cost of Debt

A company's 7% coupon rate, semiannual payment, $1,000 par value bond that matures in 20 years sells at a price of $617.71. The company's federal-plus-state tax rate is 30%. What is the firm's after-tax component cost of debt for purposes of calculating the WACC? (Hint: Base your answer on the nominal rate.) Round your answer to two decimal places.

The Cost of Equity and Flotation Costs

Messman Manufacturing will issue common stock to the public for $30. The expected dividend and growth in dividends are $2.50 per share and 4%, respectively. If the flotation cost is 9% of the issue's gross proceeds, what is the cost of external equity, r_e? Round your answer to two decimal places.