Compute the NPV of a project that cost $10,000 and generates $3,000 a year for 4 years.
Problem: (Individual or component costs of capital) Compute the cost for the following sources of financing:
1) A $1000 par value bond with a market price of $970 and a coupon interest rate of 10 percent. Flotation costs for a new issue would be approximately 5 percent. The bonds mature in 10 years and the corporate tax rate is 30 percent.
2) A preferred stock selling for $100 with an annual dividend payment of $8. The flotation cost will be $9 per share. The company's marginal tax rate is 30 percent.
3) Retained earnings totaling $4.8 million. The price of the common stock is $75 per share, and the dividend per share was $9.80 last year. The dividend is not expected to change in the future.
4) New common stock when the most recent dividend was 2.80. The company's dividends per share should continue to increase at an 8 percent growth rate into the indefinite future. The market price of the stock is currently $55; however, flotation costs of $6 per share are expected if the new stock is issued.