The bonds have a par value of $1,000

carry a coupon rate of 6%

have 15 years tomaturity, and are selling for $1 comma 055

15 years tomaturity, and are selling for $1,055

Nealon's common stock has a current market price of $32

and the firm paid a $2.70 dividend last year that is expected to increase at an annual rate of 6 percent for the foreseeable future.

a. What is the yield to maturity forNealon's bonds under current marketconditions?

b. What is the cost of new debt financing to Nealon based on current market prices after both taxes(you may use a marginal tax rate of 32% for yourestimate) and flotation costs of $40 per bond have beenconsidered?

c. What is theinvestor's required rate of return forNealon's commonstock? If Nealon were to sell new shares of commonstock, it would incur a cost of $3.00 per share. What is your estimate of the cost of new equity financing raised from the sale of commonstock?

d. Compute the weighted average cost of capital forNealon's investment using the weights reflected in the actual financing mix(that is, $10 million in retained earnings and $50 million inbonds).

e. Compute the weighted average cost of capital for Nealon where the firm maintains its target capital structure by reducing its debt offering to 40 percent of the $60 million in newcapital, or $24 million, using $20 million in retained earnings and raising $16 million through a new equity offering.

f. If you were the CFO for thecompany, would you prefer to use the calculation of the cost of capital in part

(d) or (e) to evaluate the newproject? Why?