Your firm is considering a new investment proposal and would like to calculate its weighted average cost


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.

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...
Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking...
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...
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...
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,...
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Financial Management Principles and Applications

ISBN: 978-0133423822

12th edition

Authors: Sheridan Titman, Arthur Keown, John Martin

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