(a) What is the cost of equity based on the dividend growth model? What is the cost of equity based on the security market line? Explain any difference with (a).  What is the cost of financing using preferred stock?  What is the after-tax cost of debt financing?

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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1) KAPITAL Company has 50,000 bonds outstanding. The bonds are selling at 96% of face value, ($1,000) have a 7% coupon rate, pay interest semi-annually. There are 100,000 shares of $6.30 (dividend) preferred stock outstanding with a current market price of $66 a share. In addition, there are 1.15 million shares of common stock outstanding with a market price of $77 a share and a beta of 0.80. The common stock just paid $3.46 in dividends and it is expected to grow by 3% annually. The firm's marginal tax rate is 35%. The stock market return is 10% and the Treasury bill rate is 4%.

   (a) What is the cost of equity based on the dividend growth model?

What is the cost of equity based on the security market line? Explain any difference with (a). 

What is the cost of financing using preferred stock? 

What is the after-tax cost of debt financing? 

What is the weighted average cost of capital, using the cost of equity-based (a)? Interpret your answer.

Assume the company requires $2,000,000 to fund a new project. What amount must the company raise, if flotation costs are 4% for debt, 6% for common equity, and 7% for preferred equity? 

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