Question

CINGA Corp has determined its optimal capital structure, which is composed of the following sources and target market value proportions:

Long term 30%

Preferred stock 5%

Common stock 65%

The firm can sell a 20-year, annual, 9 percent bond for $980. The bond`s flotation cost is 2 percent.

The firm has determined it can issue preferred stock at $65 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $3 per share.

The firm's common stock is currently selling for $40 per share. The dividend expected to be paid at the end of the coming year is $5.07. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.45. It is expected that to sell, a new common stock issue must be underpriced at $1 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm's marginal tax rate is 40 percent.

Calculate the firm's weighted average cost of capital assuming the firm .

Answer 1

The WACC of the firm is calculated after taking the after tax cost of debt, cost of preferred stock, cost of equity and multiplying with their respective weightage. The floation cost has been adjusted for cost of debt as well as cost of preferred stock but not for cost of equity. The floation cost for equity is given on per share basis in the question.