Ram 63.doc

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(Individual or component costs of capital) Compute the cost of capital for the firm for the following:
a. A bond that has a $1000 par value (face value) and a contract or coupon interest rate of 11.7%. The bonds have a current market value of $1128 and will mature in 10 years. The firm’s marginal tax rate is 34%.
6.368%
b. A new common stock issue that paid a $1.77 dividend last year. The firm’s dividends are expected to continue to grow at 6.2% per year forever. The price of the firm’s common stock is now $27.07.
13.144%
c. A preferred stock paying a 8.1% dividend on a $118 par value.
8.100%
d. A bond selling to yield 11.4% where the firm’s tax rate is 34%
7.524%
3.
a. A bond that has a $1000 par value (face value) and a contract or coupon interest rate of 11.5%. The bond is currently selling for a price of $1125 and will mature in 10 years. The firm’s tax rate is 34%.
6.276%
b. If the firm’s bonds are not frequently traded, how would you go about determining a cost of debt for this company?
It is standard practice to estimate the cost of debt using the yield to maturity on a portfolio of bonds with a similar credit rating and maturity as the firm’s outstanding debt.
c. A new common stock issue that paid a $1.76 divident last year. The par value of the stock is $16, and the firm’s dividents per share have grown at a rate of 7.9% per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now $27.12.
14.902%
d. A preferred stock paying a 9.4% divident on a $120 par value. The preferred shares are currently selling for $147.49.
7.648%
e. A bond selling to yield 12.9% for the purchaser of the bond. The borrowing firm faces a tax rate of 34%
8.514%