Question

The capital structure of Jolly Jellybeans Corp. is as follows: Debt: 40% Preferred stock: 10% Common...

The capital structure of Jolly Jellybeans Corp. is as follows:

Debt: 40%

Preferred stock: 10%

Common stock: 50%

Additional information about the company is also given:

Price of common stock $35
Dividend (common stock) $1.25
Growth rate (common stock) 5%
Price (preferred) $80
Dividend (preferred) $6.25
Flotation cost (preferred) $2.00
Bond YTM 8%
Corporate tax rate 25%

Compute Jolly’s WACC.

(Hint: Start with computing the costs of each component in the capital structure.) State your answer as xx.xx% (for example 13.65%)

Answer:

(a)  %

Homework Answers

Answer #1

The cost of equity is :

Re = D1/Po + g

= $1.25 * 1.05/ $35 + 0.05 ( assuming the dividend paid to be D0)

= 8.75%

The cost of preference capital is :

= Dividend paid/ price of preference share

= $6.25 / $80 - $2

= 8.01%

The after tax cost of debt is :

= 8% * (1 - 0.25)

= 6%

So, the WACC is :

weight of debt * after tax cost of debt + weight of equity * cost of equity + weight of preference * cost of preference

= 0.4* 0.06 + 0.5* 0.0875 + 0.1* 0.0801

= 0.024 + 0.0438 + 0.008

=7.58%

So, the WACC is 7.58%

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
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...
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=...
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: 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:    Debt 25 % Preferred stock 15 Common...
Given the following information: Percent of capital structure:    Debt 25 % Preferred stock 15 Common equity 60    Additional information:   Bond coupon rate 9% Bond yield to maturity 7% Dividend, expected common $ 3.00 Dividend, preferred $ 10.00 Price, common $ 50.00 Price, preferred $ 116.00 Flotation cost, preferred $ 8.50 Growth rate 6% 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: 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: 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...
Patton paints has a target capital structure of 60% debt and 40% equity with no preferred...
Patton paints has a target capital structure of 60% debt and 40% equity with no preferred stock. It'd before tax cost of debt is 12% and marginal tax rate is 40% . The current stock price is $22.50. The last dividend was $2.00 (Do) and is expected to grow at a constant rate of 7%. What is the cost of common equity and WACC?
Porta Potty Corporation has a target capital structure of 60% debt and 40% common equity, with...
Porta Potty Corporation has a target capital structure of 60% debt and 40% common equity, with no preferred stock. Its before-tax cost of debt is 12%, and its marginal tax rate is 40%. The current stock price is P = $22.50. The last dividend was D0 = $2.00, and it is expected to grow at a 7% constant rate. What is its WACC?
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...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT