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Calculating component costs of capital

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1. Goodwill Corp. has a before-tax cost of debt of 11% and marginal tax rate of 37%. Compute the after tax cost of debt?

2. Goodwill Corp. issued preferred stock that has been paying annual dividends of \$3.00 and the price of the preferred stock is \$34 a share. Compute the cost of Robin's Nest Enterprises preferred stock:

3. Goodwill Corp. has a yearly common stock dividend at \$3.25 a share. The stock is selling for \$45 a share. The dividend is expected to grow at a rate of 7% per year. Compute the cost of common stock.

Solution Preview

1. Goodwill Corp. has a before-tax cost of debt of 11% and marginal tax rate of 37%. Compute the after tax cost of debt?

After tax cost of debt = before tax cost X (1-tax rate)
After tax cost of debt = 11% X (1-0.37) = 6.93%

2. Goodwill Corp. issued ...

Solution Summary

The solution explains how to calculate the cost of debt, cost of preferred stock and cost of common stock

\$2.19