Question

Given the following information, calculate the weighted average cost of capital for Puppet Corporation. (Round intermediate calculations to 2 decimal places. Round the final answers to 2 decimal places.) Percent of capital structure: Debt 30% Preferred stock 60 Common equity 10 Additional information: Bond coupon rate 8.5% Bond yield 6.75% Bond flotation cost 2% Dividend, expected common $1.50 Price, common $30.00 Dividend, preferred 5% Flotation cost, preferred 3% Flotation cost, common 4.00% Corporate growth rate 6% Corporate tax rate 35%

a. Calculate the cost of capital assuming use of internally generated funds. Internal capital cost %

b. Calculate the cost of capital assuming use of externally generated funds. External capital cost %

Answer 1

a)

Cost of Debt
YTM	6.75%
After tax Cost of Debt (6.75% x 65%)	4.39%
after Flotation Cost (4.39% x 98%)	6.69%
Cost of Preferred Stock
Yield (5%/97%)	5.15%
Cost of Common Stock
Yield (1.5/30)	5.00%
Adding Growth 6%	11.00%
30%	6.69%	2.01%
60%	5.15%	3.09%
10%	11.00%	1.10%
Cost of Capital	6.20%

b)

Cost of Debt
YTM	6.75%
After tax Cost of Debt (6.75% x 65%)	4.39%
after Flotation Cost (4.39% x 98%)	6.69%
Cost of Preferred Stock
Yield (5%/97%)	5.15%
Cost of Common Stock
Yield (1.5/30)	5.00%
Adding Growth 6%	11.00%
After Floation Cost	11.46%
30%	6.69%	2.01%
60%	5.15%	3.09%
10%	11.46%	1.15%
Cost of Capital	6.24%