Paper , Order, or Assignment Requirements
Google Internet, Inc. is evaluating its cost of capital under alternative financing arrangements. In consultation with investment bankers, the company expects to be able to issue new debt at par with a coupon rate of 8% and to issue new preferred stock with a ksh. 2.50 per share dividend at ksh. 25 a share. The common stock of the company is currently selling for ksh. 20.00 a share. Google expects to pay a dividend of ksh. 1.50 per share next year. Market analysts foresee a growth in dividends at a rate of 5% per year. Google’s corporation’s tax rate is 30%.
Required:
Calculate the component cost of capital for the three sources of finance to Google Company.