Your firm is considering a new investment proposal and would like to calculate i

Question

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 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 11.1%. The bond is currently selling for a price of $1,120 and will mature in 10 years. The firm's tax rate is 34%. b. If the firm's bonds are not frequently traded, how would you go about determining a cost of debt for this company? c. A new common stock issue that paid a $1.71 dividend last year. THe par value of the stock is $14, and the firm's dividends per share have grown at a rate of 7.6% per year. This growth rate is expected to continue into the foreseable future. THe price of this stock is now $27.38. d. A preferred stock paying a 9.2% dividend on a $126 par value. The preferred shares are currently selling for $145.54. e. A bond selling to yield 12.9% for the purchaser of the bond. The borrowing firm faces a tax rate of 34%

Explanation / Answer

Cost of bond (approximation formula) = 111(1-.34) +(1000-1120)/10

1000+1120/2

=5.56%

cost of equity =( 1.71(1+.076)/27.38)+.076

=14.32%

cost of prefered stock =11.592/145.54

   =7.96%

e) cost of bonds 12.9(1-.34)

8.514%

b) cost of similar bond which is traded may be taken as proxy

WACC can't be calculated as weights are not given

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