14–3. (Individual or component costs of capital) 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%. The bonds have a current market value of $1,125 and will mature in 10 years. The firm’s marginal tax rate is 34%.
b. A new common stock issue that paid a $1.80 dividend last year. The firm’s dividends are expected to continue to grow at 7% per year forever. The price of the firm’s common stock is now $27.50.
c. A preferred stock that sells for $125, pays a 9% dividend and has a $100 par value that is selling at par.
d. A bond selling to yield 12% where the firm’s tax rate is 34%.
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