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 oustanding debt are selling to yield 8.35 percent while the borrowing firm's corporate tax rate is 34 percent.

b. Common stock for a firm that paid $1.04 dividend last year. The dividends are expected to grow at rate of 4.2 percent per year into the foreseeable future. The price of the stock is now $24.99.

c. A bond that has $1,000 par value and coupon interest rate of 11.4 percent with interest paid semiannually. A new issue would sell for $1,153 per bond and maturein 20 years. The firm's tax rate is 34 percent.

d. A preferred stock paying a dividiend of 6.4 percent on a $91 par value. If a new issues is offered, the shares would sell for $85.73 per share.

A. The after-tax cost of debt for the firm is %?

b. the cost of common equity for the firm is %?

c. the after-tax cost of debt for the firm is %?

d. the cost of preferred stock for the firm is %?

Explanation / Answer

A) after -tax cost of debt = 8.35(1-tax) =5.51%

B) cost of common equity= Ke= (D/V)+g (1.04/24.99)+4.2% => 0.0836 or 8.36%

C) the after tax cost of debt= formula C/2+(F-P/n*2)/F+P/2 = 114/2+(1000-1153/20*2)/1000+1153/2=4.94

tax is 34% = 4.94(0.66)=3.26%

D) Kp=D/V 6.4/91 =0.0703 or 7.03%

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.