Compute the cost of capital for the firm for the following: a. Currently bonds w

Question

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

a. Currently bonds with a similar credit rating and maturity as the firm's outstanding debt are selling to yield 731% while the borrowing firm's corporate tax rate is 34%.

The cost of capital from this bond debt is? (Round to two decimal places.)

b. Common stock for a firm that paid a $1.03 dividend last year. The dividends are expected to grow at a rate of 15% per year into the foreseeable future. The price of this stock is now $2539.

The cost of capital from the common equity is? (Round to two decimal places.)

c. A bond that has a $1,000 par value and a coupon interest rate of 114%. A new issue would sell for $1,154 per bond and mature in 20 years. The firm's tax rate is 34%.

The cost of capital from this bond debt is? (Round to two decimal places.)

d. A preferred stock paying a 7.4% dividend on a $107 par value. If a new issue is offered, the shares would sell for $84.28 per share.

The cost of the preferred stock is? (Round to two decimal places.)

Explanation / Answer

a. cost of capital from this bond debt = 731-(731*34%) = 482%

b. cost of capital={[1.03*(1+0.15)]/2539}+.15 = 4.81%

c.cost of capital from bond = 1.14*(1-0.34)= 0.7524

d. cost of preferred stock = 7.4/84.28=8.78%

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