The firm currently has one issue of bonds outstanding. The bonds have a par value of $1,000 per bond, carry a coupon rate of 7 percent, have 13 years to maturity, and are selling for $1,040. Nealon's common stock has a current market price of $32, and the firm paid a $3,00 dividend last year that is expected to increase at an annual rate of 8 percent for the foreseeable future.

• What is the yield to maturity for Nealon's bonds under current market conditions?
• 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 23 percent for your estimate) and flotation costs of $25 per bond have been considered? Note: Use N= 13 for the number of years until the new bond matures.
• What is the investor's required rate of return for Nealon's common stock? If Nealon were to sell new shares of common stock, it would incur a cost of $2.00 per share. What is your estimate of the cost of new equity financing raised from the sale of common stook?
• Compute the weighted average cost of capital for Nealon's investment using the weights reflected in the actual financing mix (that is, $30 million in retained earnings and 580 million in bonds).
• 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 $90 million in new capital, or $36 million, using 530 million in retained earnings and raising $24 million through a new equity offering.
• If you were the CFO for the company, would you prefer to use the calculation of the cost of capital in part d or e to evaluate the new proieot? Why?