Determine the expected rate of growth of dividends, Cost Accounting

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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%


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