Compute the cost of capital for the firm for the following: a. A bond that has a

Question

Compute the cost of capital for the firm for the following:

a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11.9 percent. Interest payments are $59.50 and are paid semiannually. The bonds have a current market value of $1,122 and will mature in 10 years. The firm’s marginal tax rate is 34 percent.

b. A new common stock issue that paid a $1.84 dividend last year. The firm’s dividends are expected to continue to grow at 6.5 percent per year, forever. The price of the firm’s common stock is now $27.69.

c. A preferred stock that sells for $144, pays a dividend of 8.9 percent, and has a $100 par value.

d. a Bond selling to yield 11.4 percent where the firm’s tax rate is 34 percent.

a. The after-tax cost of debt is ____% (Round to two decimal places)

b. The cost of common equity is ____% (Round to two decimal places)

c. The cost of preferred stock is ____% (Round to two decimal places)

d. The after-tax cost of debt it ____% (Round to two decimal places)

Explanation / Answer

A.The cost of capital from this bond debt is 6.16%.

B.1.84*1.065/27.69+0.065=0.1357 or 13.57.%.

C.7.5%

D.11.4*1-0.34 = 11.6%

b.080%

c.8%

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