14.12

14.13

(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: Since Mindflex's bonds do not trade very frequently, you have decided to use 9.82 percent as your cost of debt, which is the yield to maturity on a portfolio of bonds with a similar credit rating and maturity as 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 \$1.24 dividend last year. In addition, Mindflex's dividends are growing at a rate of 6.4 percent per year and this growth rate is expected to continue into the foreseeable future. The price of this stock is currently $29.07. 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 12.1 percent that is paid semiannually. The bonds are currently selling for $1,127 and will mature in 20 years. Mindflex's corporate tax rate is 34 percent. d. Cost of preferred stock: Mindflex's preferred stock pays a dividend of 7.4 percent on a $124 par value. However, the market price at which the preferred shares could be sold is only $90.15. (Individual or component costs of capital) Compute the cost of capital for the firm for the following: a. Currently bonds with a similar credit rating and maturity as the firm's outstanding debt are selling to yield 7.61 percent while the borrowing firm's corporate tax rate is 34 percent. b. Common stock for a firm that paid a $1.02 dividend last year. The dividends are expected to grow at a rate of 4.5 percent per year into the foreseeable future. The price of this stock is now $24.47. c. A bond that has a $1,000 par value and a coupon interest rate of 12.7 percent with interest paid semiannually. A new issue would sell for $1,151 per bond and mature in 20 years. The firm's tax rate is 34 percent. d. A preferred stock paying a dividend of 6.9 percent on a $103 par value. If a new issue is offered, the shares would sell for $83.73 per share