Question

United, Inc. has 320,000 shares of common stock outstanding at a market price of $52 a share. Last month, United paid an annual dividend in the amount of $1.50 per share. The dividend growth rate is 6%. United also has 10,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 5% coupon, pay interest annually, and mature in 10 years. The bonds are selling at 102% of face value. The company's tax rate is 25%. What is United's weighted average cost of capital? 6.97% 6.82% 6.71% 6.58% 6.42%

Answer #1

Market value of Equity = Number of shares * Market value of each share

= 320,000*52 = 16,640,000 $

Market Value of Bond = Number of Bonds * Market Value of each bond

= 10,000*1000*1.02 (147.840+38.25)/2429

= 10,200,000 $

Rate of equity = Dividend / stock price + dividend growth = 8.8846%

Weighted Average Cost of Capital = ((Market value of equity * cost of equity + market value of debt * cost of debt * (1-tax rate))/ (Market value of equity + market value of debt)

= (16640000*.088846+10200000*.05*.75)/(16640000+10200000)

= 6.93%

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