Current investigation has gatheted the following information of the firm who is in the 35% tax bracket.
Debt Thre firm can raise debt by selling rn1000 par value, 8% coupon interest rate, 20 year bonds on which annual interest payments will be made.to sell the issue, an average discount of rm20 per bond would have to be given.the firm also have to pay flotation costs of rm25 of per bond.
Preferred stock .The firm can sell 8% preferred stock at its rm95 per share par value. The cost of issuing and selling the preferred stock is expected to be rm5 per share.preferred stock can be sold under these terms.
Common stock The firm common stock is currently selling for rm90 per share.The firm expects to pay cash dividends of rm7 per share next year.the firm dividends have been growing at an annual rate of 6% and this growth is expected to continue into the future.the stock must be underpriced by rm7 per share., and flotation costs are expected to amount to rm5 per share.the firm can sell new common stock under these terms.
Retained earnings. When measuring this cost, the firm does not concern itself with the tax bracket or brokerage fees of owners.it expects to have available rm100,000 of retained earnings in the coming year, once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.