Question
(Individual or component costs ofcapital) You have just been hired to compute the cost of capital fordebt, preferredstock, and common stock for the Mindflex Corporation.
(Individual or component costs ofcapital)You have just been hired to compute the cost of capital fordebt, preferredstock, and common stock for the Mindflex Corporation.
a.Cost ofdebt: SinceMindflex's bonds do not trade veryfrequently, you have decided to use 8.96 percent as your cost ofdebt, which is the yield to maturity on a portfolio of bonds with a similar credit rating and maturity asMindflex's outstanding debt. Inaddition, Mindflex faces a corporate tax rate of 34 percent.
b.Cost of commonequity: Mindflex's common stock paid a $1.23 dividend last year. Inaddition, Mindflex's dividends are growing at a rate of 5.2 percent per year and this growth rate is expected to continue into the foreseeable future. The price of this stock is currently $29.98.
c.Cost ofdebt: Nowlet's assume thatMindflex's bonds are frequently traded. A Mindflex bond has a $1,000 par value(face value) and a coupon interest rate of 13.3 percent that is paid semiannually. The bonds are currently selling for $1,126 and will mature in 20 years. Mindflex's corporate tax rate is 34 percent.
d.Cost of preferredstock: Mindflex's preferred stock pays a dividend of 6.9 percent on a $120 par value. However, the market price at which the preferred shares could be sold is only $90.26.
Please solve A-D
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