Compute the cost of capital for each of the following sources of financing: a. A bond that

Question:

Compute the cost of capital for each of the following sources of financing:

a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11 percent. Interest payments are $55.00 and are paid semiannually. The bond has a current market value of $1,000 and will mature in 20 years. The firm's marginal tax rate is 30 percent.

b. A new common stock issue by a firm that paid a $1.80 dividend last year. The firm's dividends are expected to continue to grow at 7 percent per year forever. The price of the firm's common stock is now $30.00.

c. A preferred stock that sells for $125, pays a 10 percent annual dividend, and has a $100 par value.

d. A bond whose yield to maturity (based on the bond's market price) is 10 percent where the firm's tax rate is 34 percent.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...