Question

The Accidental Petroleum Company is trying to determine its weighted average cost of capital for use in making a number of investment decisions. The firm’s bonds were issued six years ago and have 12 years left until maturity. They carried a 9 percent coupon rate, and are currently selling for $974.50.

The firm’s preferred stock carries a $5.20 dividend and is currently selling at $43.25 per share. Accidental’s investment banker has stated that issue costs for new preferred will be 50 cents per share.

The firm will also need to sell new common stock to finance the projects it is now considering. Accidental Petroleum common stock is expected to pay a $1.85 per share dividend next year, and is expected to maintain an 8 percent growth rate for the foreseeable future. The stock is currently priced at $45 per share, but new common stock will have flotation costs of 60 cents per share.

Answer 1

Solution : -

Face Value of Bond = $1,000

Time to Maturity ( Nper ) = 12

Coupon Amount ( Pmt ) = $1,000 * 9% = $90

Bond Price ( PV ) = $974.50

Cost of Debt ( kd ) = ( YTM ) =   

Therefore Cost of Debt ( Kd ) = 9.36%

Cost of Preference Shares = Dividend / ( Price - Flotation Cost )

= $5.20 / ( $43.25 - $0.50 )

= 0.1216

= 12.16%

Cost of Equity ( Ke ) = [ D1 / P0 ] + g

Where P0 is Price ( net of flotation costs ) = $45 - $0.60 = $44.40

Ke = [ $1.85 / $44.40 ] + 0.08

= 0.1217

= 12.17%

If there is any doubt please ask in comments

As no number of debt or preference or equity given , so weighted average cost of capital not calculated