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Question

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 $1000 par value (face value) and a contract or coupon interest rate of 11.5 percent that is paid semiannually. The bond is currently selling for a price of $1122 and will mature in 10 years. The firm's tax rate is 34 %.

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 $1.76 dividend last year. The par value of the stock is $15 and the firm's dividends per share have grown at a rate of 8.2 percent per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now $27.75

d.A preferred stock paying a 10.3 percent dividend on a $120 par value. The preferred shares are currently selling for $ 151.57

e.A bond selling to yield 13.1 percent for the purchaser of the bond. The borrowing firm faces a tax rate of 34 percent.

The after-tax cost of debt from the firm is _%.(Round to two decimal places.)

b. 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 choice below.)

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

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

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

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

c. The cost of common equity for the firm is _%. (Round to two decimal places.)

d. The cost of preferred stock for the firm is _%. (Round to two decimal places.)

e. The after-tax cost of debt for the firm is _%. (Round to two decimal places.)