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Calculation of Cost of Debt and Cost of New Common Stock of a Company Â
Question
Suppose a certain firm’s $1000 par bonds sell currently for $960, pay an annual 9% coupon, have 2% flotation costs, and mature in 20 years. It’s $80 par preferred stock sells currently for $60, pays an annual 6.25% dividend, and has 5% flotation costs. The firm’s common stock sells currently for $15; next year’s dividend is expected to be $0.70 with an anticipated annual growth rate of 5%, and the flotation costs are 3%. The firm’s tax rate is 40%.
What is the firm’s cost of debt rD(1-T)?
What is the cost of new common stock rE?
Summary
This question belongs to finance and discusses about calculation of cost of debt and cost of new common stock of a company.
Total word count: 37
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