Smooth Guy Clothing, Inc., with a market stock price of $30, has asked you to help calculate its cost of capital. The firm can issue 10 year, 9% coupon, annual payment bonds that have a par value of $1000. The company estimates that it will receive $864 for each bond sold. The firm’s tax rate is 35%. The firm will pay a dividend of $1.75 next year with dividends expected to grow at 10% in the future. The firm expects 20% flotation costs if it issues new common equity. The firm’s beta is .90. The riskfree rate of return is 10%. The market rate of return is 16%. Calculate the cost of long-term debt.
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