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Company Cost of Capital

Bane Industries has a capital structure consisting of 60 percent common stock and 40 percent debt. A debt issue of \$1,000 par value, 8 percent bonds, maturing in 20 years and paying semiannually, will sell for \$1,100. Flotation costs for the bonds will be \$20 per bond. Current stock on the firm is currently selling at \$80 per share. The firm expects to pay a \$2 dividend next year. Dividends have grown at a rate o 8 percent per year and are expected to continue to do so for the foreseeable future. Flotation costs for the stock issue are 10 percent of the market price. What is Bane's cost of capital? The firm's marginal tax rate is 34 percent.

Solution Preview

First, we need to find the cost of bond, which is the yield to maturity after the deduction of flotation cost.

We need to calculate the yield to maturity of the bond by using the formula as follows: -

where B is the net amount received after deducting the flotation cost
C is the coupon payment
r is the discount or yield rate
n is the period

Then, we can replace the ...

Solution Summary

This solution is comprised of a detailed explanation to find Bane's cost of capital.

\$2.19