Question

Compute the cost of capital for the firm for the following:
a. Currently bonds with a similar credit rating and maturity as the firm’s outstanding debt are selling to yield 8 percent while the borrowing firm’s corporate tax rate is 34 percent.
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 percent 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 percent with interest paid semiannually. A new issue would sell for $1,150 per bond and mature in 20 years. The firm’s tax rate is 34 percent.
d. A preferred stock paying a 7 percent dividend on a $100 par value. If a new issue is offered, the shares would sell for $85 per share.



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  • CreatedOctober 31, 2014
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