A company has $100 million in capital. 45% of the capital was borrowed by issuing bonds. The bonds are currently trading at $1,050 each. The semiannual coupon rate on the bonds is 8% and they mature in 20 years. The face value of the bonds is $1,000 each. The current tax rate is 35%.

 The company also raised capital by issuing common equity. The stocks are currently trading at $45 each. Next year's dividends are expected to be $5 per share and are expected to have a constant growth rate of 3% per year. The common equity represents 50% of the company's capital.

 The rest of the capital, 5%, was obtained by issuing preferred stock. The preferred dividends are $10 per share per year. The price of the preferred stock is $100 per share. 

 

Part 1.

Calculate the cost of debt for the company.

 

Part 2.

Calculate the cost of preferred stock for the company.

 

Part 3.

Calculate the cost of common equity for the company.

 

Part 4.

Calculate the cost of capital, WACC, for the company.

Answer rating: 100% (QA)

Calculating the Cost of Capital for the Company Part 1 Cost of Debt Bond Price and Face Value Difference The current bond price 1050 is higher than th... View the full answer