Determine the expected rate of growth of dividends, Cost Accounting

General Motors has to raise new capital in one of the following three ways. Using the income tax rate of 32%, find the after-tax cost of new capital in each case.

(A) Sell common stock at $33 a share, which will pay a dividend of $3 next year. The expected rate of growth of dividends is 6% per annum forever.

Answer: 15.09%

(B) It can sell 7% bonds at $850 per bond that will mature in 10 years. Include the original issue discount.

Answer: 6.439%

(C) By selling $11 preferred stock at $90 a share, redeemable at $100 after 5 years.

Answer: 13.91%

Posted Date: 3/8/2013 4:58:52 AM | Location : United States

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