a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 12.1 percent that is paid semiannually. The bond is currently selling for a price of $1,122 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?
a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 12.1 percent that is paid semiannually. The bond is currently selling for a price of $1,122 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?
Chapter12: The Cost Of Capital
Section: Chapter Questions
Problem 10QTD
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Question
![(Individual or component costs of capital) 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 12.1 percent that is paid semiannually. The bond is currently selling for a price of $1,122 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 $1.78 dividend last year. The par value of the stock is $16, and the firm's dividends per share have grown at a rate of 7.3 percent per year. This growth rate is expected to continue into the foreseeable
future. The price of this stock is now $27.23.
d. A preferred stock paying a 9.6 percent dividend on a $123 par value. The preferred shares are currently selling for $149.05.
e. A bond selling to yield 12.9 percent for the purchaser of the bond. The borrowing firm faces a tax rate of 34 percent.
a. The after-tax cost of debt from the firm is %. (Round to two decimal places.)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F382be7de-55e9-4cfc-ab00-7e06819e5c1e%2F9c1994d7-f6d3-4eb1-910d-5b6971509c15%2Ff53icr_processed.png&w=3840&q=75)
Transcribed Image Text:(Individual or component costs of capital) 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 12.1 percent that is paid semiannually. The bond is currently selling for a price of $1,122 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 $1.78 dividend last year. The par value of the stock is $16, and the firm's dividends per share have grown at a rate of 7.3 percent per year. This growth rate is expected to continue into the foreseeable
future. The price of this stock is now $27.23.
d. A preferred stock paying a 9.6 percent dividend on a $123 par value. The preferred shares are currently selling for $149.05.
e. A bond selling to yield 12.9 percent for the purchaser of the bond. The borrowing firm faces a tax rate of 34 percent.
a. The after-tax cost of debt from the firm is %. (Round to two decimal places.)
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