Compute the cost of capital for the firm for the following: a. A bond that has a
ID: 2650509 • Letter: C
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 10.1%. Interest payments are $50.50 and are paid semiannually. The bonds have a current market value of $1,127 and will mature in 10 years. The firm's marginal tax rate is 34%
b. A new common stock issue that paid a $1.82 dividend last year. The firm's dividends are expected to continue to grow at 7.9% per year forever. The price of the firm's common stock is now $27.33.
c. A preferred stock that sells for $152, pay a dividend of 8.8%, and has a $100 value.
d. A bond selling to yield 11.4% where the firm's tax rate is 34%.
The after-tax cost of debt is _____ %
The cost of common equity is _____%
The cost of preferred stock is _____%
The after-tax cost of debt is _____%
Explanation / Answer
a) YTM is 2.5% semi annually as shown below YTM is 5% Annually as shown below Statement showing calculation of Present Value Particulars Time PVF@4% Amount PV(Amount *PVF) Cash Inflows(Coupon)(net of tax) 0.500 0.9756 33.330 32.52 Cash Inflows(Coupon)(net of tax) 1.000 0.9518 33.330 31.72 Cash Inflows(Coupon)(net of tax) 1.500 0.9286 33.330 30.95 Cash Inflows(Coupon)(net of tax) 2.000 0.9060 33.330 30.20 Cash Inflows(Coupon)(net of tax) 2.500 0.8839 33.330 29.46 Cash Inflows(Coupon)(net of tax) 3.000 0.8623 33.330 28.74 Cash Inflows(Coupon)(net of tax) 3.500 0.8413 33.330 28.04 Cash Inflows(Coupon)(net of tax) 4.000 0.8207 33.330 27.36 Cash Inflows(Coupon)(net of tax) 4.500 0.8007 33.330 26.69 Cash Inflows(Coupon)(net of tax) 5.000 0.7812 33.330 26.04 Cash Inflows(Coupon)(net of tax) 5.500 0.7621 33.330 25.40 Cash Inflows(Coupon)(net of tax) 6.000 0.7436 33.330 24.78 Cash Inflows(Coupon)(net of tax) 6.500 0.7254 33.330 24.18 Cash Inflows(Coupon)(net of tax) 7.000 0.7077 33.330 23.59 Cash Inflows(Coupon)(net of tax) 7.500 0.6905 33.330 23.01 Cash Inflows(Coupon)(net of tax) 8.000 0.6736 33.330 22.45 Cash Inflows(Coupon)(net of tax) 8.500 0.6572 33.330 21.90 Cash Inflows(Coupon)(net of tax) 9.000 0.6412 33.330 21.37 Cash Inflows(Coupon)(net of tax) 9.500 0.6255 33.330 20.85 Cash Inflows(Coupon)(net of tax) 10.000 0.6103 33.330 20.34 Cash Inflows (Maturity amount) 10.000 0.6103 1,000.000 610.27 PV of Cash Inflows 1,129.86 b) Dividend , D0 1.820 g 7.90% D1 = 1.82(1.079) 1.964 Price , P0 27.330 Ke = D1/P0 + g Ke = 1.964/27.33 + 7.9% Ke = 7.19% + 7.9% Ke = 15.09% c) Dividend @8.8% 8.800 Price 152.000 Kp = 8.8/152 5.79% d) Yield 11.40% Tax Rate 34.00% Cost of debt = 11.4%(1-.34) 7.52%
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