The problem describes a company, Skyworth, that is raising funds through debt and equity. We are given information about the company's bond issuance, common stock, dividend, growth rate, flotation costs, and tax rate. We need to calculate the following: * The firm's before-tax cost of debt. * The firm's after-tax cost of debt. * The net proceed from issuing common stock. * The firm's cost of a new issue of common stock. * The weighted average cost of capital.

1. Problem Description

The problem describes a company, Skyworth, that is raising funds through debt and equity. We are given information about the company's bond issuance, common stock, dividend, growth rate, flotation costs, and tax rate. We need to calculate the following:

* The firm's before-tax cost of debt.

* The firm's after-tax cost of debt.

* The net proceed from issuing common stock.

* The firm's cost of a new issue of common stock.

* The weighted average cost of capital.

2. Solution Steps

Step 1: Calculate the firm's before-tax cost of debt.

The yield to maturity (YTM) represents the before-tax cost of debt. Since we are not given the exact YTM, we can approximate it by dividing the annual interest payment by the net proceeds from the bond issuance.

Annual interest payment = Coupon rate * Face value = 0.11 * $1000 =$110

Net proceeds from issuing bond = $950 -$5 = $945 (given)

Before-tax cost of debt = Annual interest payment / Net proceeds = $110 /$945 = 0.1164 or 11.64%

Step 2: Calculate the firm's after-tax cost of debt.

After-tax cost of debt = Before-tax cost of debt * (1 - Tax rate)

Tax rate = 0.36 (given)

After-tax cost of debt = 0.1164 * (1 - 0.36) = 0.1164 * 0.64 = 0.0745 or 7.45%

Step 3: Calculate the net proceed from issuing common stock.

Net proceeds from issuing common stock = Stock price - Underpricing - Flotation cost

Stock price = $40 (given)

Underpricing = $3 (given)

Flotation cost = $1.5 (given)

Net proceeds = $40 -$3 - $1.5 =$35.5

Step 4: Calculate the firm's cost of a new issue of common stock.

Using the Dividend Discount Model (DDM), the cost of new equity is:

$r_e = \frac{D_1}{P_0 - F} + g$

Where:

$r_e$ = Cost of new equity

$D_1$ = Expected dividend per share = $2.4

$P_0$ = Current stock price = $40

$F$ = Flotation cost + Underpricing = $1.5 +$3 = $4.5

$g$ = Dividend growth rate = 0.06

$r_e = \frac{2.4}{40 - 4.5} + 0.06$

$r_e = \frac{2.4}{35.5} + 0.06$

$r_e = 0.0676 + 0.06 = 0.1276$ or 12.76%

Step 5: Calculate the weighted average cost of capital (WACC).

WACC = (Weight of debt * After-tax cost of debt) + (Weight of equity * Cost of equity)

Debt ratio = 1 - Equity ratio = 1 - 0.65 = 0.35

Weight of debt = 0.35

Weight of equity = 0.65

WACC = (0.35 * 0.0745) + (0.65 * 0.1276)

WACC = 0.026075 + 0.08294

WACC = 0.109015 or 10.90%

3. Final Answer

* The firm's before-tax cost of debt is 11.64%.

* The firm's after-tax cost of debt is 7.45%.

* The net proceed from issuing common stock is $35.

5. * The firm's cost of a new issue of common stock is 12.76%.

* The weighted average cost of capital is 10.90%.