Question details

Finance cost of capital
$ 12.00

The Allied Group intends to expand the company's operation by making significant investments in several opportunities available to the group. Accordingly, the group has identified a need for additional financing in preferred and new common stock and new bond issues. The risk free rate for the company is 7% and the appropriate tax rate is 40%.  Also, The beta coefficient  for the company is 1.3 and the market risk premium  (Km) is 12.

New Debt
The company has been advised that new bonds can be sold on the market 
at par ($1000) with an annual coupon of 8%, for 30 years.

New Common Stock 
Market analysis has determined that given the positive history of the firm, 
new common stock can be sold at $29 per share, with the last dividend being 
paid of $2.25 per share. The growth rate on any new common stock has 
been estimated at a constant rate of 15% per year for the next 3 years.

Preferred Stock 
New Preferred Stock can be issued with an annual dividend of 10% of par 
and is paid annually and currently would sell for $90 per share.

Questions: Address all of the following questions in a brief but thorough manner.

·         What is the after tax cost of new common stock, assuming constant growth in each of the next 3 years?

·         What would the dividend yield in each of the first three years if the growth rate is 12%?

·         What is the after tax component cost of new debt today?

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