(Computing individual or component costs of capital) You have just been hired to compute the cost of capital for debt, preferred stock, and common stock for the Mindflex Corporation.

a. Cost of debt: Because Mindflex’s bonds do not trade very frequently, you have decided to use 7 percent as your cost of debt, which is the yield to maturity on a portfolio of bonds with a credit rating and maturity similar to those of Mindflex’s outstanding debt. In addition, Mindflex faces a corporate tax rate of 34 percent.

b. Cost of common equity: Mindflex’s common stock paid a $1.30 dividend last year. In addition, Mindflex’s dividends are growing at a rate of 4 percent per year, and this growth rate is expected to continue into the foreseeable future. The price of this stock is currently $30.

c. Cost of debt: Now let’s assume that Mindflex’s bonds are frequently traded. A Mindflex bond has a $1,000 par value (face value) and a coupon interest rate of 13 percent that is paid semiannually. The bonds are currently selling for $1,125 and will mature in 20 years. Mindflex’s corporate tax rate is 34 percent.

d. Cost of preferred stock: Mindflex’s preferred stock pays an 8 percent dividend on a $125 par value. However, the market price at which the preferred shares could be sold is only $90.