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: Because Mindflex’s bonds do not trade very frequently, you have decided to use 9 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 percent per year and this growth rate is expected to continue into the foreseeable future. The price of this stock is currently $30.
c. Cost of debt: Now let’s assume that Mindflex’s bonds are frequently traded. A Mind-flex bond has a $1,000 par value (face value) and a coupon interest rate of 13 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 10 percent dividend on a $125 par value. However, the market price at which the preferred shares could be sold is only $90.

  • CreatedOctober 31, 2014
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