[solution] » (Individual or component costs of capital) Compute the cost of capital for the firm for the follo

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(Individual or component costs of capital) Compute the cost of capital for the firm for the following:

1. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 10.8 percent. Interest payments are $54.00 and are paid semiannually. The bonds have a current market value of $1,130 and will mature in 10 years. The firm's marginal tax rate is 34 percent.
2. A new common stock issue that paid a $1.77 dividend last year. The firm's dividends are expected to continue to grow at 7.4 percent per year, forever. The price of the firm's common stock is now $27.61.
3. A preferred stock that sells for $141, pays a dividend of 9.5 percent, and has a $100 par value.
4. A bond selling to yield 11.4 percent where the firm's tax rate is 34 percent.

1

 

54

 

1000

 

1130

 

20

 

4%

 

0.08817

 

0.66

 

5.82% YTM

 

Cost of capital 2

 

1.77

 

1.90098

 

14.29% Cost of capital

 

3

 

Cost of capital 6.74%

 

4 Cost of capital 7.52%

 

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Oct 14, 2020

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