Question: 1. (Cost of preferred stock) The preferred stock of LLC International sells for $35 and pays 5 percent dividends. The net price of the stock is $30. What is the cost of capital for the preferred stock?
2. (Cost of debt) The Zephyr Corporation is contemplating a new investment to be financed 33 percent from debt. The firm could sell new $1,000 par value bonds at a net price of $945. The coupon interest rate is 12 percent, and the bonds would mature in 15 years. If the company is in a 34 percent tax bracket, what is the after-tax cost of capital to Zephyr for bonds?