# 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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