(Individual or component costs of capital) Compute the cost of capital for the f

Question

(Individual or component costs of capital) Compute the cost of capital for the firm for the following:

b. A new common stock issue that paid a $1.85 dividend last year. The firm's dividends are expected to continue to grow at 7.7 percent per year, forever. The price of the firm's common stock is now $27.91. The cost of common equity is ? %.

c.A preferred stock that sells for $131, pays a dividend of 9.2 percent, and has a $100 par value. The cost of preferred stock is ?%.

d. A bond selling to yield 11.4 percent where the firm's tax rate is 34 percent. The after-tax cost of debt is ?%.

Explanation / Answer

b. A new common stock issue that paid a $1.85 dividend last year. The firm's dividends are expected to continue to grow at 7.7 percent per year, forever. The price of the firm's common stock is now $27.91. The cost of common equity is ? %. Ans) Do = $       1.85 G = 7.70% P0 = $    27.91 The Cost of Commin equity is P0 = D1/Ke-G 27.91 = 1.85*(1.077)/X-0.077 27.91 = 1.99245/X-0.077 27.91(X-0.077) = 1.99245 27.91X-27.91*0.077 = 1.99245 27.91X - 2.14907 = 1.99245 27.91X = 1.99245+2.14907 27.91X = 4.14152 X = (1.99245+2.14907)/27.91 X = 15% c.A preferred stock that sells for $131, pays a dividend of 9.2 percent, and has a $100 par value. The cost of preferred stock is ?%. Ans) Price of Share = $        131 Dividend = 9.20% = 100*9.20/100 Dividend = 9.2 Cost of preferred Stock is = Dividend /Price of Share = 9.20/131 = 7% d. A bond selling to yield 11.4 percent where the firm's tax rate is 34 percent. The after-tax cost of debt is ?%. Ans) Yield of 11.4% Assume 1000 Bond Then Interest Expenses = 114 Less:-Tax Saving = -38.76 Total Cost of the debt 75.24 Then Cost of debt is = 75.24/1000*100 = 7.52 = 7.52%

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