(Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following: a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11.2 percent that is paid semiannually. The bond is currently selling for a price of $1,124 and will mature in 10 years. The firm's tax rate is 34 percent. b. If the firm's bonds are not frequently traded, how would you go about determining a cost of debt for this company? c. A new common stock issue that paid a $1.75 dividend last year. The par value of the stock is $16, and the firm's dividends per share have grown at a rate of 8.1 percent per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now $28.08. d. A preferred stock paying a 9.4 percent dividend on a $126 par value. The preferred shares are currently selling for $152.43. e. A bond selling to yield 13.5 percent for the purchaser of the bond. The borrowing firm faces a tax rate of 34 percent. a. The after-tax cost of debt from the firm is %. (Round to two decimal places.)

(Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following: a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11.2 percent that is paid semiannually. The bond is currently selling for a price of $1,124 and will mature in 10 years. The firm's tax rate is 34 percent. b. If the firm's bonds are not frequently traded, how would you go about determining a cost of debt for this company? c. A new common stock issue that paid a $1.75 dividend last year. The par value of the stock is $16, and the firm's dividends per share have grown at a rate of 8.1 percent per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now $28.08. d. A preferred stock paying a 9.4 percent dividend on a $126 par value. The preferred shares are currently selling for $152.43. e. A bond selling to yield 13.5 percent for the purchaser of the bond. The borrowing firm faces a tax rate of 34 percent. a. The after-tax cost of debt from the firm is %. (Round to two decimal places.)

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter7: Types And Costs Of Financial Capital

Section: Chapter Questions

Problem 11EP

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To assist with evaluating potential capital projects, Insignia Corporation Limited is seeking to determine its Weighted Average Cost of Capital. Utilising information from the financial statements, the company has the following capital structure: Debt: Bonds outstanding has a face value of $835,000,000, currently selling at 105% of par. The coupon rate on these bonds is 9% and there is 10 years left to maturity. (Hint: you can use the lowest multiple of $1,000 for the YTM calculation only) Common stock: 13,000,000 shares of common stock outstanding with a market price of $60.00. The company has no preference shares outstanding. Additional Information: The Company’s tax rate is 30%. The current risk free rate is 3.50%; market return is 8%. The Company’s beta is 2.50. Required: Calculate the Weighted Average Cost of Capital for Insignia Corporation Limited.
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