1. Scherr Enterprises has a series of 8 percent coupon bonds outstanding with a $1,000 par value. The bonds mature in 10 years and currently sell for $946. If new bonds are issued, the issuance cost is expected to be $11 per bond. Scherr's marginal tax rate is 40 percent. What is the marginal after-tax cost of debt for Scherr? (Assume annual interest payments.)
2. Clarke Equipment currently pays a common stock dividend of $3.50 per share. The common stock price is $60. Analysts have forecast that earnings and divi- dends will grow at an average annual rate of 6.8 percent for the foreseeable future.
a. What is the marginal cost of retained earnings?
b. What is the marginal cost of new equity if the issuance costs per share are $3? ST3. Vargo, Inc., has a beta estimated by Value Line of 1.3. The current risk-free rate (short-term) is 7.5 percent and the market risk premium is 8.6 percent. What is the cost of equity capital for Vargo?