(Individual or component costs of capital) Your firm is considering a new invest
ID: 2488025 • Letter: #
Question
(Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital foe the firm for the following: A bond that has a $1,000 par value (face value) and a contract or coupon merest rate of 12.6 percent that b paid semiannually. The bond is currently selling for a price of $1,122 and will mature in 10 years. The firm's tax rate is 34 percent. If the firm's bonds are not frequently traded, how would you go about determining a cost of debt for this company? A new common stock issue that paid a $1.73 dividend last year. The par value of the stock is $16, and the firm's dividends per share have grown at a rate of 7 1 percent per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now $28.65. A preferred stock paving a 10.3 percent dividend on a $127 par value. The preferred shares are currently selling for $150.69. A bond selling to yield 12.3 percent for the purchaser of the bond. The borrowing firm faces a tax rate of 34 percent. The after-tax cost of debt from the firm is %. If the firm's bonds are not frequently traded, how would you go about determining a cost of debt for this company? The cost of common equity for the firm is %. The cost of preferred stock for the firm is %.Explanation / Answer
Solution.
A.
Before tax cost of debt = 12.60%
Tax rate = 34%
After tax cost of debt = 12.6% x 0.66 = 8.31%.
B.
Answer is B
C.
Calculation of cost of equity.
Ke = (D1 / P0) + g
Ke = ( $1.73 / $28.63 ) + 7.1 %
= 13.14%
D.
Cost of preferrence share.
Formula = Kp = D / Po
= Kp = $13.08 / $150.69
Kp = 8.68%
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