The bonds have a par value of ?$1,000 carry a coupon rate of 6% have 15 years to? maturity, and are selling for ?$1 comma 055 15 years to maturity, and are selling for ?$1,055 ?Nealon's common stock has a current market price of $32 and the firm paid a ?$2.70 dividend last year that is expected to increase at an annual rate of 6 percent for the foreseeable future.
a. What is the yield to maturity for? Nealon's bonds under current market? conditions?
b. What is the cost of new debt financing to Nealon based on current market prices after both taxes? (you may use a marginal tax rate of 32% for your? estimate) and flotation costs of ?$40 per bond have been? considered?
c. What is the? investor's required rate of return for? Nealon's common? stock? If Nealon were to sell new shares of common? stock, it would incur a cost of ?$3.00 per share. What is your estimate of the cost of new equity financing raised from the sale of common? stock?
d. Compute the weighted average cost of capital for? Nealon's investment using the weights reflected in the actual financing mix? (that is, ?$10 million in retained earnings and ?$50 million in? bonds).
e. Compute the weighted average cost of capital for Nealon where the firm maintains its target capital structure by reducing its debt offering to 40 percent of the ?$60 million in new? capital, or ?$24 million, using ?$20 million in retained earnings and raising ?$16 million through a new equity offering.
f. If you were the CFO for the? company, would you prefer to use the calculation of the cost of capital in part ?(d?) or ?(e?) to evaluate the new? project? Why?