14-6. (Individual or component costs of capital) Compute the cost of capital for

Question

14-6. (Individual or component costs of capital) Compute the cost of capital for the firm for the following: a. Currently bonds with a similar credit rating and maturity as the firm' s outstanding debt are selling to yield 8 percent while the borrowing firm's corporate tax rate is 34 percent. b. Common stock for a firm that paid a $2.05 dividend last year. The dividends are expected to grow at a rate of 5 percent per year into the foreseeable future. The price of this stock is now $25. c. A bond that has a $ 1,000 par value and a coupon interest rate of 12 percent with interest paid semiannually. A new issue would sell for $1,150 per bond and mature in 20 years. The firm's tax rate is 34 percent. d. A preferred stock paying a 7 percent dividend on a $100 par value. It a new issue is offered, the shares would sell for $85 per share.

Explanation / Answer

Answer:

a. Cost of Debt = interest rate * (1 – tax rate)

= 8% * (1-0.34)

= 5.28%

b. Cost of Equity =( Expected Dividend / Current Price ) + growth rate

= (2.05*105% /25) + 0.05

= 0.1361

=13.61%

c. Cost of Debt = interest rate * (1 – tax rate)

= 12% * (1-0.34)

= 7.92%

d. Cost of preferred Stock = Dividend / net proceed per share from issue

=(100*7%) /85

=0.0824

= 8.24%

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.