Question

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

Debt ???%

Preferred stock ???

Common Equity ???

Weighted average cost of capital ???%

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Homework Answers

Answer #1

Cost of debt = YTM = 11%

weighted cost of debt = Weight*Cost of debt *(1-Tax rate)

= .10*11*(1-.3)

= 0.77%

Cost of Preferred stock = Fixed dividend/(price - flotation cost)

= 14/(110-2.5)

= 14/107.5

= 13.02%

weighted cost of Preferred stock= Weight*Cost of Preferred stock

= .05*13.02

= .651%

Cost of Common stock = Price/expected dividend + growth rate

= (70/7)+4

= 10+4

= 14%

weighted cost of Common stock= Weight*Cost of Common stock

= .85*14

= 11.90%

WACC = 11.9+.651+.77

= 13.321

= 13.32%

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