(Individual or component costs of capital) You have just been hired to compute the cost of capital for debt, preferred stock, and common stock for the Mindflex Corporation. a. Cost of debt: Since Mindflex's bonds do not trade very frequently, you have decided to use 8.67 percent as your cost of debt, which is the yield to maturity on a portfolio of bonds with a similar credit rating and maturity as Mindflex's outstanding debt. In addition, Mindflex faces a corporate tax rate of 34 percent. b. Cost of common equity: Mindflex's common stock paid a $1.26 dividend last year. In addition, Mindflex's dividends are growing at a rate of 5.5 percent per year and this growth rate is expected to continue into the foreseeable future. The price of this stock is currently $30.89. c. Cost of debt: Now let's assume that Mindflex's bonds are frequently traded. A Mindflex bond has a $1,000 par value (face value) and a coupon interest rate of 12.1 percent that is paid semiannually. The bonds are currently selling for $1,124 and will mature in 20 years. Mindflex's corporate tax rate is 34 percent. d. Cost of preferred stock: Mindflex's preferred stock pays a dividend of 7.9 percent on a $130 par value. However, the market price at which the preferred shares could be sold is only $91.39. a. The after-tax cost of debt for the firm is %. (Round to two decimal places.)
(Individual or component costs of capital) You have just been hired to compute the cost of capital for debt, preferred stock, and common stock for the Mindflex Corporation. a. Cost of debt: Since Mindflex's bonds do not trade very frequently, you have decided to use 8.67 percent as your cost of debt, which is the yield to maturity on a portfolio of bonds with a similar credit rating and maturity as Mindflex's outstanding debt. In addition, Mindflex faces a corporate tax rate of 34 percent. b. Cost of common equity: Mindflex's common stock paid a $1.26 dividend last year. In addition, Mindflex's dividends are growing at a rate of 5.5 percent per year and this growth rate is expected to continue into the foreseeable future. The price of this stock is currently $30.89. c. Cost of debt: Now let's assume that Mindflex's bonds are frequently traded. A Mindflex bond has a $1,000 par value (face value) and a coupon interest rate of 12.1 percent that is paid semiannually. The bonds are currently selling for $1,124 and will mature in 20 years. Mindflex's corporate tax rate is 34 percent. d. Cost of preferred stock: Mindflex's preferred stock pays a dividend of 7.9 percent on a $130 par value. However, the market price at which the preferred shares could be sold is only $91.39. a. The after-tax cost of debt for the firm is %. (Round to two decimal places.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:(Individual or component costs of capital) You have just been hired to compute the cost of capital for debt, preferred stock, and common stock for the Mindflex Corporation.
a. Cost of debt: Since Mindflex's bonds do not trade very frequently, you have decided to use 8.67 percent as your cost of debt, which is the yield to maturity on a portfolio of bonds with a
similar credit rating and maturity as Mindflex's outstanding debt. In addition, Mindflex faces a corporate tax rate of 34 percent.
b. Cost of common equity: Mindflex's common stock paid a $1.26 dividend last year. In addition, Mindflex's dividends are growing at a rate of 5.5 percent per year and this growth rate is
expected to continue into the foreseeable future. The price of this stock is currently $30.89.
c. Cost of debt: Now let's assume that Mindflex's bonds are frequently traded. A Mindflex bond has a $1,000 par value (face value) and a coupon interest rate of 12.1 percent that is paid
semiannually. The bonds are currently selling for $1,124 and will mature in 20 years. Mindflex's corporate tax rate is 34 percent.
d. Cost of preferred stock: Mindflex's preferred stock pays a dividend of 7.9 percent on a $130 par value. However, the market price at which the preferred shares could be sold is only
$91.39.
a. The after-tax cost of debt for the firm is %. (Round to two decimal places.)
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