firm for the following: a. Currently, new bond issues with a credit rating and maturity similar to those of the firm’s outstanding debt are selling to yield 8 percent, while the borrowing firm’s corporate tax rate is 34 percent. b. Common stock for a firm that paid a $2.05 dividend last year. The dividends are expected to grow at a rate of 5 percent per year into the foreseeable future. The price of this stock is now $25. c. A bond that has a $1,000 par value and a coupon interest rate of 12 percent with interest paid semiannually. A
(Computing individual or component costs of capital) Compute the cost of capital for
the firm for the following:
a. Currently, new bond issues with a credit rating and maturity similar to those of
the firm’s outstanding debt are selling to yield 8 percent, while the borrowing
firm’s corporate tax rate is 34 percent.
b. Common stock for a firm that paid a $2.05 dividend last year. The dividends are
expected to grow at a rate of 5 percent per year into the foreseeable future. The
price of this stock is now $25.
c. A bond that has a $1,000 par value and a coupon interest rate of 12 percent with
interest paid semiannually. A new issue would sell for $1,150 per bond and mature in 20 years. The firm’s tax rate is 34 percent.
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