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Computing the cost of debt before taxes and after taxes

**Problem 1**

A company issues 15-year, $1,000 par-value bonds, with a coupon rate of 5%. The bonds are sold for $619.70. The tax rate is 30%. Compute the cost of debt before taxes and after taxes.

**Problem 2**

Suppose a company issues common stock to the public for $25 a share. The expected dividend is $2.50 per share and the growth in dividends is 8%. If the flotation cost is 10% of the issue proceeds, compute the cost of external equity, re.

**Problem 3**

Calculate the cost of preferred stock (rPS) with the given information:

Par Value = $200

Current Price = $208

Flotation Cost = $16

Annual Dividend = 12% of Par

**Problem 4**

A company is investigating the effect on its cost of capital with respect to the tax rate. Suppose there is a capital structure of 20% debt, 10% preferred stock, and 70% common stock. The cost of financing with retained earnings is re = 12%, the cost of preferred stock financing is rPS = 7%, and the before-tax cost of debt is rd = 9%. Calculate the weighted average cost of capital (WACC) given a tax rate of 35%.

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Derive the functional relationship among the no-arbitrage values of the two vertical spreads C (K1) - C (K2) and C (K2) - C (K3).