Individual or component costs of capital

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(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 firms outstanding debt are selling to yield 8% while the borrowing firms corporate tax rate is 34%

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% 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% with interest paid semi annually. A new issue would sell for $1,150 per bond and mature in 20 years. The firms tax rate is also 35%.

d. A preferred stock paying a 7% dividend on a $100 par value. If a new issue is offered, the shares would sell for $85 per share.

Reference no: EM13874612

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