(Individual of component cost of capital) Compute the cost of capital for the fi
ID: 2647564 • Letter: #
Question
(Individual of component cost of capital) Compute the cost of capital for the firm for the following
A. A bond that has a $1000 par value (face value) and a contract or coupon interest rate of 10.6 %. Interest payments are $53.00 and are paid semiannually. The bonds have a current market value of $1126 and will mature in 10 years. The firms marginal tax rate is 34 %
B. A new common stock issue that paid a $1.81 dividend last year. The firms dividends are expected to continue to grow at 6.9% per year, forever. The price of the firm common stock is now $27.59.
C. A preferred stock that sells for $130, pays a dividend of 8.2% and has a $100 par value.
D. A bond selling to yeild 11.7% where the firms tax rate is 34%
Explanation / Answer
A. A bond that has a $1000 par value (face value) and a contract or coupon interest rate of 10.6 %. Interest payments are $53.00 and are paid semiannually. The bonds have a current market value of $1126 and will mature in 10 years. The firms marginal tax rate is 34 %
Before Tax Cost of Debt = rate(nper,pmt,pv,fv) *2
Before Tax Cost of Debt = rate(20,53,-1126,1000) * 2
Before Tax Cost of Debt = 8.69 %
After Tax Cost of Debt = 8.69*(1-34%)
After Tax Cost of Debt = 5.74%
B. A new common stock issue that paid a $1.81 dividend last year. The firms dividends are expected to continue to grow at 6.9% per year, forever. The price of the firm common stock is now $27.59.
Cost of Common Stock = Expected Dividend/Stock price + growth rate
Cost of Common Stock = 1.81*(1+6.9%)/27.59 + 6.9%
Cost of Common Stock = 13.91%
C. A preferred stock that sells for $130, pays a dividend of 8.2% and has a $100 par value.
Cost of Preferred Stock = 8.2/130
Cost of Preferred Stock = 6.31%
D. A bond selling to yeild 11.7% where the firms tax rate is 34%
After Tax Cost of Debt = 11.7*(1-34%)
After Tax Cost of Debt = 7.72%
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