Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
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The Carla Vista Products Co. currently has debt with a market value of $250 million outstanding. The debt consists of 9 percent
coupon bonds (semiannual coupon payments) which have a maturity of 15 years and are currently priced at $1,257.30 per bond. The
firm also has an issue of 2 million preferred shares outstanding with a market price of $20. The preferred shares pay an annual
dividend of $1.20. Carla Vista also has 14 million shares of common stock outstanding with a price of $20.00 per share. The firm is
expected to pay a $2.20 common dividend one year from today, and that dividend is expected to increase by 6 percent per year
forever. If Carla Vista is subject to a 40 percent marginal tax rate and firm's. Calculate the appropriate cost of capital for a new project
that is financed with the same proportion of debt, preferred shares, and common shares as the firm's current capital structure. Also
assume that the project has the same degree of systematic risk as the average project that the firm is currently undertaking (the
project is also in the same general industry as the firm's current line of business).
Appropriate cost of capital
8.45
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