The Allied Group intends to expand the company’s operation by making significant investments in several opportunities available to the group. Accordingly, the group has identified a need for additional financing in preferred and new common stock and new bond issues.

New Debt

The company has been advised that new bonds can be sold on the market

at par ($1000) with an annual coupon of 8%, for 30 years.

New Common Stock

Market analysis has determined that given the positive history of the firm,

new common stock can be sold at $29 per share, with the last dividend being

paid of $2.25 per share. The growth rate on any new common stock has

been estimated at a constant rate of 15% per year for the next 3 years.

Preferred Stock

New Preferred Stock can be issued with an annual dividend of 10% of par

and is paid annually and currently would sell for $90 per share.

Questions: Address all of the following questions in a brief but thorough manner.

• What is the after tax cost of new common stock, assuming constant growth in each of the next 3 years?
• What would the dividend yield in each of the first three years if the growth rate is 12%?
• What is the after tax component cost of new debt today?