Calculation of Cost of Debt and Cost of New Common Stock of a Company  

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