Compute the cost of capital for the firm for the following: a. A bond that has a

Question

Compute the cost of capital for the firm for the following: a. A bond that has a $1,000.00 par value (face value) and a contract or coupon interest rate of 11.6 percent. Interest payments are $58.00 and are paid semiannually. The bonds have a current market values of $1121 and will mature in 10 years. The firm's marginal tax rate is 34 percent. b. A new common stock issue that paid a $1.81 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 $27.24. c. A preferred stock that sells for $138, pays a dividend of 9.3 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.

a. The after-tax cost of debt is ___%

Explanation / Answer

a

Cost Of debt

Yield(Excel Funtion)

=RATE(20,58,-1121,1000,0)*2

Cost Of debt (After Tax)

=9.68%*(1-0.34)=6.39%

b

Cost Of equty=Ke = D1 / P0 + g

D1 =(1.81*1.071)

p0 =27.24

G =7.1

Ke =14.22%

c

Cost Of prefered stock =(9.3/138)

6.74%

d

A bond selling to yield 12.3 percent where the firm's tax rate is 34 percent.

Cost Of debt

Yield =12.3%

Cost Of debt (After Tax)

=12.30%*(1-0.34)=8.12

a

Cost Of debt

Yield(Excel Funtion)

=RATE(20,58,-1121,1000,0)*2

Cost Of debt (After Tax)

=9.68%*(1-0.34)=6.39%

b

Cost Of equty=Ke = D1 / P0 + g

D1 =(1.81*1.071)

p0 =27.24

G =7.1

Ke =14.22%

c

Cost Of prefered stock =(9.3/138)

6.74%

d

A bond selling to yield 12.3 percent where the firm's tax rate is 34 percent.

Cost Of debt

Yield =12.3%

Cost Of debt (After Tax)

=12.30%*(1-0.34)=8.12

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