Assume that the organization will issue a 5-year bond with an annual coupon rate of 7.625%. You
Question:
Assume that the organization will issue a 5-year bond with an annual coupon rate of 7.625%. You are considering making a $100,000 investment in the organization either through buying bonds or stocks. Comparing the bond's yield with the annual return on stock investments calculated above, you have to make a decision. Which investment option would you prefer? In addition, when we compute the weighted average cost of capital (WACC) for a project, we normally use a distinct "cost" for each component of capital (debt vs. equity). Normally, equity capital comes at a higher cost than debt capital. Please explain why this is normally the case and whether/how it is related to your decision on making an investment is the organization either through buying bonds to stocks.