TABLE 2 TABLE 3
Financing Cost Data
Long-term debt: The firm can raise $ 700,000 of additional debt by selling 10-year, $ 1,000, 12 % annual interest rate bonds to net $ 970 after flotation costs. Any debt in excess of $ 700,000 will have a before-tax cost, rd, of 18 %.
Preferred stock: Preferred stock, regardless of the amount sold, can be issued with a $ 60 par value and a 17 % annual dividend rate. It will net $ 57 per share after flotation costs.
Common stock equity: The firm expects its dividends and earnings to continue to grow at a constant rate of 15 % per year. The firm’ s stock is currently selling for $ 20 per share. The firm expects to have $ 1,300,000 of available retained earnings. Once the retained earnings have been exhausted, the firm can raise additional funds by selling new common stock, netting $ 16 per share after underpricing and flotation costs.
TO DO:
a. Over the relevant ranges noted in the following table, calculate the after-tax cost of each source of financing needed to complete the table.
Source of capital Range of new financing After-tax cost(%) Long-term debt $ 0 –$ 700,000 _________
$ 700,000 and above _________ Preferred stock $ 0 and above
_________ Common stock equity $ 0 –$ 1,300,000
_________