Question

Duffy Enterprises has issued common stock, preferred stock, and debt to finance its operation. The table...

Duffy Enterprises has issued common stock, preferred stock, and debt to finance its operation. The table below shows financial information on the firm.

2018 Balance Sheet:
Interest bearing debt $569,387.00
Preferred stock $47,082.00
Shareholder equity $750,000.00

Duffy has publicly traded common stock that has a capitalization currently of $1,750,809.00.

An analyst has estimated that the cost of debt for Duffy is 7.00%, the cost of the preferred stock is 9.00%, and the cost of the common equity is 14.00%. Duffy has a marginal tax rate of 40.00%.

What is the cost of capital for Duffy?

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Answer #1

** For Cost of Capital, Market Values are used.

Equity = 1,750,809

Debt = 569,387

Preferred Equity= 47,082

Total Capital = 1,750,809 + 569,387 + 47,082 = 2367278

Cost of Capital = (Cost of Equity * Weight of Equity) + (Cost of Debt after tax * Weight of Debt) + (Cost of Preferred Stock * Cost of Preferred Stock)

= 14% * 1750809 / 2367278 + 7% * (1-0.40) * 569387 / 2367278 + 9% * 47082 / 2367278

= 11.55%

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