Question

Alvin C. York, the founder of York Corporation, thinks that the optimal capital structure of his company is 30 percent debt, 15 percent preferred stock, and the rest common equity. If the company has a 25 percent interest subsidy tax rate, compute its weighted average cost of capital given that: (15 pts)

YTM of its debt is 10 percent.

New preferred stock will have a market value of $31, a dividend of $2 per share, and flotation costs of $1 per share.

Price of common stock is currently $100 per share, and new common stock can be issued at the same price with flotation costs of $4 per share. The expected dividend in one year is $4 per share, and the growth rate is 6 percent.

Answer #1

The interest expense is tax deductible hence cost of debt is after tax

A firm has determined its optimal capital structure, which is
composed of the following sources and target market value
proportions:
Source of capital
Target Market Proportions
Long-term Debt
30%
Preferred stock
5%
Common stock equity
65%
Debt: The firm can sell a 20-year, $1,000 par
value, 9 percent bond for $980. A flotation cost of 2 percent of
the face value would be required in addition to the discount of
$20.
Preferred Stock: The firm has determined it can
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Bond face .......... ………………………………………………$1,000.00
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Cost of capital
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Use the following information for the next five problems.
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