Question

Problem 11-23 Weighted average cost of capital [LO11-1]

Given the following information:

Percent of capital structure:

Preferred stock | 20 | % |

Common equity | 60 | |

Debt | 20 | |

Additional information:

Corporate tax rate | 40 | % | |

Dividend, preferred | $ | 11.00 | |

Dividend, expected common | $ | 6.50 | |

Price, preferred | $ | 107.00 | |

Growth rate | 9 | % | |

Bond yield | 8 | % | |

Flotation cost, preferred | $ | 7.50 | |

Price, common | $ | 91.00 | |

Calculate the weighted average cost of capital for Digital
Processing Inc. **(Do not round intermediate calculations.
Input your answers as a percent rounded to 2 decimal places.)
**

debt_______%

preferred stock_____________

common equity_____________

weighted average of cost of capital_____________

Answer #1

Weight of equity = E/A |

Weight of equity = |

W(E)=0.6 |

Weight of debt = D/A |

Weight of debt = 0.2 |

W(D)=0.2 |

Weight of preferred equity =1-D/A-E/A |

Weight of preferred equity = =1-0.2 - 0.6 |

W(PE)=0.2 |

Cost of equity |

As per DDM |

Price= Dividend in 1 year/(cost of equity - growth rate) |

91 = 6.5/ (Cost of equity - 0.09) |

Cost of equity% = 16.14 |

After tax cost of debt = cost of debt*(1-tax rate) |

After tax cost of debt = 8*(1-0.4) |

= 4.8 |

cost of preferred equity |

cost of preferred equity = Preferred dividend/price-flotation cost*100 |

cost of preferred equity = 11/(99.5-7.5)*100 |

=11.06 |

WACC=after tax cost of debt*W(D)+cost of equity*W(E)+Cost of preferred equity*W(PE) |

WACC=4.8*0.2+16.14*0.6+11.06*0.2 |

WACC =12.86% |

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Preferred
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20
%
Common
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40
Debt
40
Additional information:
Corporate tax
rate
34
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Dividend,
preferred
$
8.50
Dividend,
expected common
$
2.50
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preferred
$
105.00
Growth rate
7
%
Bond yield
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%
Flotation cost,
preferred
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3.60
Price,
common
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Input your answers as a percent rounded to 2 decimal...

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