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##### (Individual or component costs of capital)

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**Question**

(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;12.4 percent that is paid semiannually. The bond is currently selling for a price of $1,126;and will mature in 10 years. The firms tax rate is 34 percent.;b. If the firms bonds are not frequently traded how you would go about determining a cost of;debt for this company.;c.;A new common stock issue that paid a $1.73 dividend last year. The par value of the;stock is $16, and the firms dividends per share have grown at a rate of 7.1 percent per;year. This growth rate is expected to continue into the foreseeable future. The price of this;stock is now $28.61.;d. A preferred stock paying a 9.5 percent dividend on a $122 par value. The preferred;shares are currently selling for $147.94.;e. A bond selling to yield 12.2 percent for the purchaser of the bond. The borrowing firm;faces a tax rate of 34 percent.;a. The after cost tax cost of debt is _____%. Round to two decimal places.;b. Compute the cost of capital for the firm with a bond that has a $1,000 par value a;contract of coupon interest rate of 12.6% that is paid semiannually. The bond currently;selling for a price of $1,118 and will mature in ten years. The firms tax rate is 34%;3. (Cost of common equity) Salte Corporation is issuing new common stock at a market price of;$27.63. Dividends last year were $1.42 and are expected to grow at an annual rate of 6.1;percent forever. What is Saltes cost of common equity?;4. (Cost of debt) Temple-Midland Inc. is issuing a $1,000 par value bond that pays 8.6 percent;annual interest and matures in 15 years. Investors are willing to pay $954 for the bond and;Temple faces a tax rate of 24 percent. What is Temples after tax cost of debt on the bond?;5. (Cost of preferred stock) The preferred stock of Walter Industries Inc. currently sells for;$36.51 a share and pays $2.53 in dividends annually. What is the firms cost of capital for the;preferred stock?;6. (Cost of preferred stock) the preferred stock of Gator Industries sells for $34.18 and pays;$2.79 per year in dividends. What is the cost of preferred stock financing? If Gator were to issue;492,000 more preferred shares just like the ones it currently has outstanding, it could sell them;for $34.18 a share but would incur flotation costs of $3.19 per share. What are the flotation;costs for issuing the preferred shares and how should this cost be incorporated into the NPV of;the project being financed?;The firms cost of preferred stock financing is _____% (round to two decimal places);7. (Cost of common equity) The common stock for the Bestsold Corporation sells for $58.57 a;share. Last year the firm paid a $4.06 dividend, which is expected to continue to grow 4.1 per;year into the indefinite future. If Bestsolds tax rate is 34 percent, what is the firms cost of;common equity?;The firms common equity capital is ____%. (round to two decimal places);8. (Cost of common equity) the common stock for the Hetterbrand Corporation sell for $60.67;and the last dividend paid was $2.25. Five years ago the firm paid $1.95 per share, and;dividends are expected to grow at the same annual rate in the future as they did over the past;five years.;a. what is the estimated cost of common equity to the firm using the dividend growth model?;b. Hetterbrands CFO has asked his financial analyst to estimate the firms cost of common;equity using the CAPM as a way of validating the earlier calculations. The risk free rate of;interest is currently 4.6 percent, the market risk premium is estimated to be 4.6 percent, and;Hetterbrands beta is 0.77. What is your estimate of the firms cost of common equity using this;method?. The estimated cost of common equity to the firm using the dividend growth model is ____%.;Round to two decimals.

Paper#23991 | Written in 18-Jul-2015

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