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 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 11.6%. The bonds have a current market value of $1,124 and will mature in 10 years. The firms marginal 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 $1.74 divided last year. The par value of the stock is $16, and the firm’s dividends per share have grown at a rate of 8.8% per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now $27.98.

d. A preferred stock paying a 9.9% dividend on a $112 par value. The preferred shares are currently selling for $145.53.

e. A bond selling to yield 12.4% for the purchaser of the bond. The borrowing firm faces a tax rate of 34%.