Question

A firm’s optimal capital structure is 45% debt, 10% preferred stock, and 45% common equity. The...

A firm’s optimal capital structure is 45% debt, 10% preferred stock, and 45% common equity. The firm’s tax rate is 43%. The beta coefficient of the firm’s debt is 0.2, the risk-free rate of interest is 2.7% and the market risk premium (RM-RF) is 7.3%. The firm’s preferred stock currently has a price of $84 and it carries a dividend of $10 per share. Currently, the price of a share of common equity was $29 per share. The last dividend payment is $2.52. Dividends are expected to grow at a rate of 4 percent for the future. What is this firm’s weighted average cost of capital? Select the best answer. Group of answer choices 0 percent 5 percent 10 percent 15 percent 20 percent

Homework Answers

Answer #1

Calculation of :

Cost of debt = Risk free rate of return + beta coff ( market risk premium)

= 2.7 % + 0.2 * 7.3 %

   = 2.7 % + 1.46%

   = 4.16 %

Cost of preffered stock = Dividend / Price * 100

=10/84 * 100 = 11.90476%

Cost of equity = last dividend ( 1 + Groth rate) / Price + growth rate

   = 2.52(1+0.04)/29 + 0.04

= 0.090372 + 004

= 0.130372 or 13.0372 %

Weighted average cost of capital = 4.16 * 45% + 11.90476*10% + 13.0372 *45%

= 8.9292 %

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Percent of capital structure:    Debt 35 % Preferred stock 20 Common equity 45    Additional...
Percent of capital structure:    Debt 35 % Preferred stock 20 Common equity 45    Additional information:   Bond coupon rate 11% Bond yield to maturity 9% Dividend, expected common $ 5.00 Dividend, preferred $ 12.00 Price, common $ 60.00 Price, preferred $ 120.00 Flotation cost, preferred $ 3.80 Growth rate 8% Corporate tax rate 40% Calculate the Hamilton Corp.'s weighted cost of each source of capital and the weighted average cost of capital. Weighted Cost Debt= Preferred stock= Common equity=...
All City, Inc., is financed 45% with​ debt, 6% with preferred​ stock, and 49% with common...
All City, Inc., is financed 45% with​ debt, 6% with preferred​ stock, and 49% with common stock. Its cost of debt is 5.8%​, its preferred stock pays an annual dividend of $2.52 and is priced at $29. t has an equity beta of 1.13. Assume the​ risk-free rate is 2.1%​, the market risk premium is 7.3% and​ All City's tax rate is 35%. What is its​ after-tax WACC?
Given the following information. Percent of capital structure: Debt 35 % Preferred stock 20 Common equity...
Given the following information. Percent of capital structure: Debt 35 % Preferred stock 20 Common equity 45 Additional information: Bond coupon rate 10 % Bond yield 8 % Dividend, expected common $6.00 Dividend, preferred $13.00 Price, common $65.00 Price, preferred $138.00 Flotation cost, preferred $5.20 Corporate growth rate 5 % Corporate tax rate 40 % Calculate the weighted average cost of capital for Genex Corporation. Line up the calculations in the order shown in Table 11-1. (Do not round your...
Given the following information: Percent of capital structure:    Debt 10 % Preferred stock 5 Common...
Given the following information: Percent of capital structure:    Debt 10 % Preferred stock 5 Common equity 85    Additional information:   Bond coupon rate 13% Bond yield to maturity 11% Dividend, expected common $ 7.00 Dividend, preferred $ 14.00 Price, common $ 70.00 Price, preferred $ 110.00 Flotation cost, preferred $ 2.50 Growth rate 4% Corporate tax rate 30% Calculate the Hamilton Corp.'s weighted cost of each source of capital and the weighted average cost of capital. (Do not round...
Given the following information: Percent of capital structure:   Debt 30 % Preferred stock 10 Common equity...
Given the following information: Percent of capital structure:   Debt 30 % Preferred stock 10 Common equity 60 Additional information:   Bond coupon rate 18% Bond yield to maturity 14% Dividend, expected common $ 8.00 Dividend, preferred $ 15.00 Price, common $ 75.00 Price, preferred $ 112.00 Flotation cost, preferred $ 6.50 Growth rate 3% Corporate tax rate 35% Calculate the Hamilton Corp.'s weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate calculations....
Given the following information: Percent of capital structure: Debt 20 % Preferred stock 10 Common equity...
Given the following information: Percent of capital structure: Debt 20 % Preferred stock 10 Common equity (retained earnings) 70    Additional information:   Bond coupon rate 14% Bond yield to maturity 12% Dividend, expected common $ 2.00 Dividend, preferred $ 9.00 Price, common $ 45.00 Price, preferred $ 100.00 Flotation cost, preferred $ 7.50 Growth rate 9% Corporate tax rate 35% Calculate the Hamilton Corp.'s weighted cost of each source of capital and the weighted average cost of capital. (Do not...
Given the following information: Percent of capital structure: Preferred stock 20 % Common equity 40 Debt...
Given the following information: Percent of capital structure: Preferred stock 20 % Common equity 40 Debt 40 Additional information: Corporate tax rate 34 % Dividend, preferred $ 8.50 Dividend, expected common $ 2.50 Price, preferred $ 105.00 Growth rate 7 % Bond yield 9.5 % Flotation cost, preferred $ 3.60 Price, common $ 75.00 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...
Given the following information: Percent of capital structure: Preferred stock 20 % Common equity 40 Debt...
Given the following information: Percent of capital structure: Preferred stock 20 % Common equity 40 Debt 40 Additional information: Corporate tax rate 34 % Dividend, preferred $ 8.50 Dividend, expected common $ 2.50 Price, preferred $ 105.00 Growth rate 7 % Bond yield 9.5 % Flotation cost, preferred $ 3.60 Price, common $ 75.00 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...
McKinsey and Sons has a target capital structure that calls for 50% debt, 10% preferred stock,...
McKinsey and Sons has a target capital structure that calls for 50% debt, 10% preferred stock, and 40% common equity. The firm can issue new 10 year debt with an annual coupon of 9% for $968.606. The firm is in a 35% tax bracket. The firm's preferred stock sells for $80 per share and pays a dividend of $10 per share; however, the firm will only net $77 per share on the sale of new preferred stock. The firm's common...
Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common...
Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new common equity, it will carry a cost of 16.8%. If its current tax rate is 40%, how much...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT