The Cost of Equity and Flotation Costs
1. Suppose a company will issue new 20-year debt with a par value of $1,000 and a coupon rate of 9%, paid annually. The tax rate is 40%. If the flotation cost is 2% of the issue proceeds, then what is the after-tax cost of debt? Disregard the tax shield from the amortization of flotation costs. Round your answer to two decimal places.
2. Messman Manufacturing will issue common stock to the public for $35. The expected dividend and growth in dividends are $3.75 per share and 6%, respectively. If the flotation cost is 14% of the issue's gross proceeds, what is the cost of external equity, re? Round your answer to two decimal places.