Question

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. Input your answers as a percent rounded to 2 decimal places.)
  

Answer 1

Weighted cost of each source of capital

	Weighted Cost
Debt	2.73%
Preferred Stock	1.42%
Common Equity	8.20%

Cost of Debt

Cost of Debt = Bonds Yield x (1 – Tax Rate)

= 14% x (1 – 0.35)

= 9.10%

Weighted Cost = 2.73% [9.10% x 30%]

Cost of Preferred Stock

Cost of Preferred Stock = Preferred Dividend / [Price of Preferred stock – Flotation cost]

= [$15.00 / ($112 - $6.50)] x 100

= 14.22%

Weighted Cost = 1.42% [14.22% x 10%]

Cost of Common Stock

Cost of Common Stock = [D1 / P0] + g

= [$8.00 / 75.00] + 0.03

= 0.1067 + 0.03

= 0.1367

= 13.67%

Weighted Cost = 8.20% [13.67% x 60%]

Weighted Average Cost of Capital

= Weighed Cost of Debt + Weighted Cost of Preferred stock + Weighted cost of Common Stock

= 2.73% + 1.42% + 8.20%

= 12.35%