Q3

Pullman, Inc. had an after-tax operating income last year of P1,583,000. Three sources of financing were used by the company: P2 million of mortgage bonds paying 8 percent interest; P3 million of unsecured bonds paying 10 percent interest, and P10 million of ordinary shares, which was considered to be no more or less risky than other stocks. Stockholders, on the average, received six percentage points higher than the return on long-term government bonds. The Philippine Treasury is issuing bonds at 6 percent. The tax rate of Pullman is 40%. Required: 1. Compute the cost of capital in using mortgage bonds. 2. Compute the cost of capital in using unsecured bonds. 3. Compute the cost of capital in using ordinary shares