Question

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 11.4 percent that is paid semiannually. The bond is currently selling for a price of ​$1,129 and will mature in 10 years. The firm's tax rate is 34 percent.

c) A new common stock issue that paid a ​$1.77 dividend last year. The par value of the stock is ​$16 and the​ firm's dividends per share have grown at a rate of 7.1percent per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now ​$27.18.

d) A preferred stock paying a 10.7 percent dividend on a ​$122 par value. The preferred shares are currently selling for $147.78.

e) A bond selling to yield 13.3 percent for the purchaser of the bond. The borrowing firm faces a tax rate of 34 percent.

Find:

a) The​ after-tax cost of debt from the firm is

c) The cost of common equity for the firm is

d) The cost of preferred stock for the firm is

 e) The​ after-tax cost of debt for the firm is

Answer 1

a) The​ after-tax cost of debt from the firm is

=(RATE(10*2,11.4%/2*1000,-1129,1000)*(1-34%))

=3.10%

c) The cost of common equity for the firm is

=Expected dividend/current price+growth

=(1.77*1.071)/27.18+7.1%

=14.07%

d) The cost of preferred stock for the firm is:

=(10.7%*122)/147.78

=8.83%

e) The​ after-tax cost of debt for the firm is:

=13.3%*(1-34%)

=8.78%