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 $1,000 par value (face value) and a contract or coupon interest rate of 12 percent that is paid semiannually. The bond is currently selling for a price of $1,125 and will mature in 10 years. The firm’s tax rate is 34 percent.
b. If the firm’s bonds are not frequently traded, how would you go about determining a cost of debt for this company?
c. A new common stock issue that paid a $1.75 dividend last year. The par value of the stock is $15, and the firm’s dividends per share have grown at a rate of 8 percent per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now $28.
d. A preferred stock paying a 10 percent dividend on a $125 par value. The preferred shares are currently selling for $150.
e. A bond selling to yield 13 percent for the purchaser of the bond. The borrowing firm faces a tax rate of 34 percent.