Individual or component costs of capital - 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:Compute eachin % (Round to two decimal places)
1. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 12%. The bond is currently selling for a price of $1,125 and will mature in 10 years. The firm's tax rate is 34%.
2. If the firm's bonds are not frequently traded, how would you go about determining a cost of debt for this company?
3. A new common stock issue that paid a $1.75 dividend last year. The par value of the stock is $15, and the firm's dividends per share have grown at a rate of 8% per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now $28.
4. A preferred stock paying a 10% dividend on a $125 par value. The preferred shares are currently selling for $150.
- A bond selling to yield 13% for the purchaser of the bond. The borrowing firm faces a tax rate of 34%.
(Determining relevant cash flows) Captain's Cereal is considering introducing a variation of its current breakfast cereal, Crunch Stuff. This new cereal will be similar to the old, with the exception that it will contain sugar-coated marshmallows shaped in the form of stars. The new cereal will be called Crunch Stuff n' Stars. It is estimated that the sales for the new cereal will be $25 million; however, 20% of those sales will draw from former Crunch Stuff customers who have switched to Crunch Stuff n' Stars and who would not have switched if the new product had not been introduced. What is the relevant sales level to consider when deciding whether or not to introduce Crunch Stuff n' Stars?