Question

(Individual or component costs of​ capital)  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 10.9 percent. Interest payments are $54.50 and are paid semiannually. The bonds have a current market value of $1,121 and will mature in 10 years. The​ firm's marginal tax rate is 34 percet.

b.  A new common stock issue that paid a $1.78 dividend last year. The​ firm's dividends are expected to continue to grow at 7.7 percent per​ year, forever. The price of the​ firm's common stock is now $27.32.

c.  A preferred stock that sells for $127, pays a dividend of 8.4 percent, and has a $100 par value.

d.  A bond selling to yield 11.4 percent where the​ firm's tax rate is 34 percent.

Answer 1

I have calculated cost of individual components of cost of capital below with detailed formulas.

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