Reference no: EM132381174
?(Individual or component costs of? capital)
You have just been hired to compute the cost of capital for? debt, preferred? stock, and common stock for the Mindflex Corporation.
a. Cost of? debt: Since? Mindflex's bonds do not trade very?frequently, you have decided to use 9.00 percent as your cost of? debt, which is the yield to maturity on a portfolio of bonds with a similar credit rating and maturity as? Mindflex's outstanding debt. In? addition, Mindflex faces a corporate tax rate of 34 percent.
b. Cost of common? equity: ? Mindflex's common stock paid a ?$1.25 dividend last year. In? addition, Mindflex's dividends are growing at a rate of 6.0 percent per year and this growth rate is expected to continue into the foreseeable future. The price of this stock is currently ?$30.00.
c. Cost of? debt: Now? let's assume that? Mindflex's bonds are frequently traded. A Mindflex bond has a ?$1,000 par value? (face value) and a coupon interest rate of 13.0 percent that is paid semiannually. The bonds are currently selling for ?$1,125 and will mature in 20 years. ? Mindflex's corporate tax rate is 34 percent.
d. Cost of preferred? stock: ? Mindflex's preferred stock pays a dividend of 7.0 percent on a ?$125 par value. ? However, the market price at which the preferred shares could be sold is only ?$90.00.
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: You have just been hired to compute the cost of capital for? debt, preferred? stock, and common stock for the Mindflex Corporation.
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