BioCom has two outstanding bond issues. Bond 1 matures in six years, has a par value of $1,000, has a coupon rate of 7% paid semiannually, and now sells for $1,031. Bond 2 matures in sixteen years, has a par value of $1,000, has a coupon rate of 8% paid semiannually, and now sells for $1,035. The preferred stock has a par value of $50, pays a dividend of $1.50, and has a current market value of $19. The common stock sells for $35 per share and recently paid a dividend of $2.50. The company expects dividends to grow at an average annual rate of 6% for the foreseeable future. The risk-free rate is 3%, the expected rate of return on the market portfolio is 12%, BioCom's beta is 1.2, and its marginal tax rate is 34%.
BioCom's Capital by Percentages
|
Type of Capital
|
Percent of Book Value
|
Percent of Market Value
|
|
Bond 1
|
18%
|
15%
|
|
Bond 2
|
20%
|
20%
|
|
Preferred stock
|
20%
|
10%
|
|
Common stock
|
5%
|
Not available
|
|
Retained earnings
|
37%
|
Not available
|
|
Total common equity
|
|
55%
|
1. Compute the yield to maturity and the after-tax cost of debt for the two bond issues. You should show your work!
2. Compute BioCom's cost of preferred stock.You should show your work!
3. Compute BioCom's cost of common equity. Use the average of results from the dividend growth model and the security market line.