(Individual or component costs of capital) Compute the cost of capital for the f
ID: 2615810 • Letter: #
Question
(Individual or component costs of capital) 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 10.9 percent. Interest payments are $54.50 and are paid semiannually. The bonds have a current market value of $1,124 and will mature in 10 years. The firm's marginal tax rate is 34 percet. b. A new common stock issue that paid a $1.76 dividend last year. The firm's dividends are expected to continue to grow at 7.1 percent per year, forever. The price of the firm's common stock is now $27.47 c. A preferred stock that sells for $136, pays a dividend of 8.5 percent, and has a $100 par value d. A bond selling to yield 12.3 percent where the firm's tax rate is 34 percent.Explanation / Answer
Answering the first question as per Chegg policy
A) Par Value = FV = $1000
Coupon rate = R = 10.9% = 0.109
Interest payments = C = $54.50, Semi-Annually
Market Price = $1124
Time = N = 10 Years = 10 x 2 = 20 half years
Marginal Tax rate = 34% = 0.34
The formula for Market value of bond is = C x {1 - [1/(1+R)T) ] / R} + [FV / (1+R)T]
1124 = (54.50/R) x [1 - [1/(1+R)20)] + 1000 / (1+R)20
By Trial and error method,
R = 4.85%
YTM = 8.99%
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