|Source of capital||Target Market Proportions|
|Common stock equity||65%|
Debt: The firm can sell a 20-year, $1,000 par value, 9 percent bond for $980. A flotation cost of 2 percent of the face value would be required in addition to the discount of $20.
Preferred Stock: 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.
Common Stock: 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 has exhausted all retained earnings.
*Any doubt please comment
After tax cost of debt = 5.67%
|Rate||9.45%||[Rate ( nper, pmt,-pv,fv)]|
Cost of preferred stock = 8/ (65-3) = 12.90%
Cost of common stock :
Growth rate : 3.45* ( 1+g) ^5 = 5.07
Growth rate = 8.00%
Cost of capital = [5.07/ (40- 1)] + 8% = 21%
|Source||Target Market Proportions||Cost||(a)*(b)|
|Common stock equity||65%||21.00%||13.65%|
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