Assume that the organization will issue a 5-year bond with an annual coupon rate of 7.625%. You are considering making a $100,000 investment in the organization either through buying bonds or stocks. Comparing the bond's yield with the annual return on stock investments calculated above, you have to make a decision. Which investment option would you prefer? In addition, when we compute the weighted average cost of capital (WACC) for a project, we normally use a distinct "cost" for each component of capital (debt vs. equity). Normally, equity capital comes at a higher cost than debt capital. Please explain why this is normally the case and whether/how it is related to your decision on making an investment is the organization either through buying bonds to stocks.

 

Year Beginning-of-Year Price ($) End-of-Year Price ($) Dividend Paid Per Share ($) Dividend Yield (%) Capital Appreciation (%) Annual Return (%) Average annual return: 9.67% 2019 $132.53 $137.11 $0.60 0.45% 3.46% 3.91% 2018 $114.20 $132.53 $0.40 0.35% 16.05% 16.40% 2017 $112.63 $114.20 $0.40 0.36% 1.39% 1.75% 2016 $112.64 $112.63 $0.40 0.36% -0.01% 0.35% 2015 $102.53 $112.64 $0.40 0.39% 9.86% 10.25% 2014 $82.02 $102.53 $0.30 0.37% 25.01% 25.37%