Question 1 (Individual or component costs of capital) Compute the cost of capital for the firm for the following:
“a. A bond that has a $1000 par value (face value) and a contract or coupon interest rate of 10.5%. The bonds have a current market value of $1,128 and will mature in 10 years. The firm’s marginal tax rate is 34%
b. A new common stock issue that paid a $1.76 dividend last year. The firm’s dividends are expected to continue to grow at 7.6% per year forever. The price of the firm’s common stock is now $27.07.
c. A preferred stock paying a 9.9% dividend on a $141 par value.
d. A bond selling to yield 12.4% where the firm’s tax rate is 34%.
2). 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 $1000 par value (face value) and a contract or coupon interest rate of 12.2%. The bonds is currently selling for a price of $1,126 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?
d. A preferred stock paying a 10.6% dividend on a $126 par value. The preferred shares are currently selling for $151.74.
e. A bond selling to yield 13.6% for the purchaser of the bond. The borrowing firm faces a tax rate of 34%.
Could you provide the calculation for each steps?