(Computing individual or component costs of capital) Compute the cost of capital for each of the following...

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(Computing individual or component costs of capital) Compute the cost of capital for each of the following sources of financing:

a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11 percent. Interest payments are $55.00 and are paid semiannually. The bond has a current market value of $1,000 and will mature in 20 years. The firm’s marginal tax rate is 30 percent.

b. A new common stock issue by a firm that paid a $1.80 dividend last year. The firm’s dividends are expected to continue to grow at 7 percent per year forever. The price of the firm’s common stock is now $30.00.

c. A preferred stock that sells for $125, pays a 10 percent annual dividend, and has a

$100 par value.

d. A bond whose yield to maturity (based on the bond’s market price) is 10 percent where the firm’s tax rate is 34 percent.

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Financial Management Principles And Applications

ISBN: 9781292222189

13th Global Edition

Authors: Sheridan Titman, Arthur Keown, John Martin

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