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 10.5 percent. interest payments are $52.50 and are paid semiannually.The bonds have a current market value of $1,123 and will mature in 10 years. The firm's marginal tax rate is 34 percent.

b. a new common stock issue that paid $1.78 dividend last year. the firm's dividends are expected to continue to grow at 6.1 percent per year, forever. the price of the firm's common stock is now $27.04.

c. A preferred stock that sells for $140, pays a dividend of 8.8 percent and has a $100 par value.

d. A bond selling to yield 12.5 percent where the firm's tax rate is 34 percent

Explanation / Answer

1 Cost of bond:

= [(1+5.25%)^2-1]×(1-34%)

= 7.11%

2. Cost of common stock:

= $1.78÷$27.04+6.1%

= 12.68%

3. Cost of preference share:

= $8.8÷$140

= 6.29%

4. Cost of bond:

= 12.5%×(1-34%)

= 8.25%

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