Investment Proposal

Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help 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 a coupon interest rate of 11.3%.


The bond is currently selling for a price of $1,129 and will mature in10 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 $1.74 dividend last year. The par value of the stock is $16 and the firm’s dividends per share have grown at a rate of 7.8% per year. The growth rate is expected to continue in the foreseeable future. The price of the stock now is $27.65.

d. A preferred stock paying a 10.1% dividend on $129 par value. The preferred shares are currently selling for $146.68.

e. A bond selling to yield 13.4% for the purchaser of the bond. The borrowing firm faces a tax rate of 34%

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