Question 2:

Compute the cost of capital for the Richards firm for the following: (25% w)

a)A bond the has a $1.000 par value (face value) and a contract or coupon interest rate of 9%. The bond has a current market value of $1.125 and will mature in 10 years. The firms marginal tax rate is 34%.

b)A new common stock issue that pays a $1.8 dividend last year. The firms dividends are expected to continue to grow at 7% per year forever. The price of the firms common stock is now $27.5.

c)A preferred stock paying a 10% dividend on a $125 par value. The preferred shares are currently selling for 150 $.

d)A bond selling to yield 12% where the firms tax rate is 34%