(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:
- A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 10.9 percent that is paid semiannually: the bond is currently setting for a price of $1,129 and will mature in 10 years. The firm's tax rate is 34 percent. If the firm's bonds are not frequently traded, how would you go about determining a cost of debt for this company?
- A new common stock issue that paid a $1.74 dividend last year. The par value of the stock is $16, and the firm's dividends per share have grown at a rate of 9.7 percent per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now $27.88.
- A preferred stock paying an 8.3 percent dividend on a $120 par value. The preferred shares are currently setting for $153.18.
- A bond setting to yield 12.9 percent for the purchaser of the bond: the borrowing firm faces a tax rate of 34 percent.