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 comma 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 comma 128 and will mature in 10 years. The firm's marginal tax rate is 34 percet. b. A new common stock issue that paid a $1.81 dividend last year. The firm's dividends are expected to continue to grow at 6.4 percent per year, forever. The price of the firm's common stock is now $27.08. c. A preferred stock that sells for $129 , pays a dividend of 8.3 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 nothing %. (Round to two decimal places.) b. The cost of common equity is nothing %. (Round to two decimal places.) c. The cost of preferred stock is nothing %. (Round to two decimal places.) d. The after-tax cost of debt is nothing %. (Round to two decimal places.)

a. The after-tax cost of debt is

nothing %.

(Round to two decimal places.)

b. The cost of common equity is

nothing %.

(Round to two decimal places.)

c. The cost of preferred stock is

nothing %.

(Round to two decimal places.)

d. The after-tax cost of debt is

nothing %.

(Round to two decimal places.)

Answer 1

a. The cost of debt is :

FV = $1000

PMT = $54.5

PV = ($1128)

N = 20 YEARS

I/Y = 8.9373% ( 4.4687 *2)

Therefore the after tax cost of debt is (1 - 0.34) * 8.9373%

= 5.8986%

= 5.90% (rounded off to two decimal places)

b. Re = D1/PO + G

= 1.81* (1.064)/ 27.08 + 0.064

= 13.51%

C. Cost of preferred stock is = preferred dividend/ cost of preference shares

= 8.3/129

= 6.43%

d. The cost of debt * (1 - tax rate)

= 12.3 * (1 -0.34)

= 8.12% (rounded off to two decimal places)