# Calculate the after-tax cost of a $25 million debt issue

Calculate the after-tax cost of a $25 million debt issue that Pullman Manufacturing Corporation (40 percent marginal tax rate) is planning to place privately with a large insurance company. This long-term issue will yield 6.6 percent to the insurance company.

(3.) Calculate the after-tax cost of preferred stock for Bozeman-Western Airlines, Inc. which is planning to sell $10 million of $4.50 cumulative preferred stock to the public at a price of $48 a share. The company has a marginal tax rate of 40 percent.

(4.) The following financial information is available on Fargo Fabrics, Inc.:

Current per-share market price= $20.25

Current per-share dividend= $1.12

Current per-share earnings= $ 2.48

Beta = 0.90

Expected market risk premium = 6.4%

Risk-free rate (20-year Treasury bonds) = 5.2%

Past 10 years earnings per share:

20X1 & nbsp; $1.39 20X6 $1.95

20X2 1.48 20X7 2.12

20X3 1.6 0 20X8 2.26

;20X4 1.68 20X9 2.40

20X5 1.79 20Y0 2.48

This past-earnings growth trend is expected to continue for the foreseeable future. The dividend payout ratio has remained approximately constant over the past 10 years and is expected to remain at current levels for the foreseeable future.

Calculate the cost of equity capital using the following methods:

(a.)The constant growth rate dividend capitalization model approach

(b.)The Capital Asset Pricing Model approach

(7.) The Ewing Distribution Company is planning a $100 million expansion of its chain of discount service stations to several neighboring states. This expansion will be financed, in part, with debt issued with a coupon interest rate of 6.8%. The bonds have a 10-year maturity and a $1,000 face value, and they will be sold to net Ewing $990 per bond. Ewings marginal tax rate is 40%. Preferred stock will cost Ewing 7.5% after taxes. Ewing common stock pays a dividend of $2 per share. The current market price per share is $35. Ewings dividends are expected to increase at an annual rate of 5% for the foreseeable future. Ewing expects to generate sufficient retained earnings to meet the common equity portion of the funding needed for the expansion. Ewings target capital structure is as follows:

Debt = 20%

Preferred stock= 5%

Common equity = 75%

Calculate the weighted cost of capital that is appropriate to use in evaluating this expansion program.