Calculate the after-tax cost of a $25 million debt issue that Pullman Manufacturing Corporation (40 percent marginal tax rate) is planning to place privately with a large insurance company. This long-term issue will yield 6.6 percent to the insurance company.

Calculate the after-tax cost of preferred stock for Bozeman-Western Airlines, Inc. which is planning to sell $10 million of $4.50 cumulative preferred stock to the public at a price of $48 a share. The company has a marginal tax rate of 40 percent.

The following financial information is available on Fargo Fabrics, Inc.:
Current per-share market price = $20.25
Current per-share dividend = $1.12
Current per-share earnings = $2.48
Beta = 0.90
Expected market risk premium = 6.4%
Risk-free rate (20-year Treasury bonds) = 5.2%
Past 10 years earnings per share:
20X1 $1.39 20X6 $1.95
20X2 1.48 20X7 2.12
20X3 1.60 20X8 2.26
20X4 1.68 20X9 2.40
20X5 1.79 20Y0 2.48
This past-earnings growth trend is expected to continue for the foreseeable future. The dividend payout ratio has remained approximately constant over the past 10 years and is expected to remain at current levels for the foreseeable future.
Calculate the cost of equity capital using the following methods:
a. The constant growth rate dividend capitalization model approach
b. The Capital Asset Pricing Model approach

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