Question

# Calculate the weighted average cost of capital Given: The firm has enough cash on hand to...

Calculate the weighted average cost of capital

Given:

• The firm has enough cash on hand to provide the necessary equity financing (no new common stock).
• Common Stock/Equity
• 1,000,000 common shares outstanding
• Current stock price is \$11.25 per share
• Dividends expected at \$1.00 per share
• Dividends will grow at 5% per year after that
• Flotation costs for new share would be \$0.10 per share
• Preferred Stock/Equity
• 150,000 preferred share outstanding
• Current preferred stock price is \$9.50 per share
• Dividend is \$0.95 per share
• If new share issued, they must be sold at 5% less than current market price and involve direct flotation costs of \$0.25 per share
• Debt
• \$10,000,000 (par value) in outstanding debt in form of bonds
• 10 years left to maturity.
• Annual coupons at coupon rate of 11.3%
• Currently price at 106% of par value (\$10,600,000).
• Flotation costs for new bonds would equal 6% of par value (\$600,000)
• Tax rate
• 40%

Cost of Equity = (Dividend / (Stock Price - Floatation Cost)) + Growth Rate

Cost of Equity = (1 / (11.25 - 0.10)) + 5%

Cost of Equity = 13.97%

Cost of Preferred Stock = Dividend / (Price - Floatation Cost)

Cost of Preferred Stock = 0.95 / (9.025 - 0.25)

Cost of Preferred Stock = 0.95 / 8.775

Cost of Preferred Stock = 10.83%

Cost of Debt:

After Tax Cost of Debt = Cost of Debt * (1 - Tax)

After Tax Cost of Debt = 0.06 * (1 - 0.40)

= 0.06 * 0.6

After Tax Cost of Debt = 3.60%

WACC:

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