Estimate the costs of the following sources of finance for Falcon Company Ltd (FCL), who derive part of their income from Canada and have a company tax rate of 36%.
Debt: FCL is issuing a $100 par value bond that pays 9% semi-annual interest and matures in 6 years. Investors are willing to pay $92.50 for the bond. Issue costs will be 12% of market value.
Equity: FCL is issuing new ordinary shares at a market price of $3.45. Dividends last year were 21¢ and are expected to grow at an annual rate of 6% forever. Issue costs will be 7% of market price.
Preference shares: FCL $2.00 par value preference shares currently sell for $1.40 and pay a 7% dividend. The net price of the security after issue costs is $1.25