Your firm is considering new investment proposal

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Reference no: EM131359202

Your firm is considering a new investment proposal and would like to calculate the weighted average cost of capital. to help in this, compute the cost of capital for the firm for the following:

1. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 12.1% that is paid semiannually. The bond is currently selling for a price of $1120 and will mature in 10 years. The firm;s tax rate is 34%. The after-tax cost of debt from the firm is _________%. (Round to two decimal places).

2. If the firm's bonds are not frequently traded, how would you go about determining a cost of debt for this company? (Select the best answer)

a. It is standard practice to estimate the cost of using the yield to maturity on a portfolio of bonds with a similar credit rating and maturity as the firm's outstanding debt

b. It is standard practice to estimate the cost of using the average coupon rate on a portfolio of bonds with similar credit rating and maturity as the firm's outstanding debt.

c. it is standard practice to estimate the cost of debt using the yield to maturity on a treasuty bond of the same maturity.

d. It is standard practice to estimate the cost of debt using the bond's coupon rate and adjust it for inflation

3. A new common stock issue that paid $1.77 dividend last year. The par value of the stock is $14, and the firm's dividends per share have grown at a rate of 8.9% per year. The growth rate is expected to continue onto the foreseeable future. The price of this stock is now 28.98. The cost of common equity for the firm is _______%.(Round to two decimal places)

4. A preferred stock paying a 10.6% dividend on a $124 par value. The preferred shares are currently selling for $149.23. The cost of preferred stock for the firm is____________%.(Round to two decimal places)

5. A bond selling to yield 13.2% for the purchaser of the bond. The borrowing firm faces a tax rate of 34%. The after-tax cost of debt for the firm is _________%. (Round to two decimal places)

Reference no: EM131359202

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