A-Rod Manufacturing Company is trying to calculate its cost of
capital for use in making a capital budgeting decision. Mr. Jeter,
the vice-president of finance, has given you the following
information and has asked you to compute the weighted average cost
of capital.The company currently has outstanding a bond with a 10.9
percent coupon rate and another bond with an 8.5 percent rate. The
firm has been informed by its investment banker that bonds of equal
risk and credit rating are now selling to yield 11.8 percent. The
common stock has a price of $63 and an expected dividend
(D1) of $1.83 per share. The historical growth
pattern (g) for dividends is as follows: $1.38 ; 1.52 ;
1.67 ; 1.83 The preferred stock is selling at $83 per share and
pays a dividend of $7.90 per share. The corporate tax rate is 30
percent. The flotation cost is 2.0 percent of the selling price for
preferred stock. The optimal capital structure for the firm is 25
percent debt, 15 percent preferred stock, and 60 percent common
equity in the form of retained earnings. a.
Compute the historical growth rate. (Do not round
intermediate calculations. Round your answer to the nearest whole
percent and use this value as g. Input your answer as a
whole percent.) Growth rate ____ % b. Compute
the cost of capital for the individual components in the capital
structure. (Use the rounded whole percent computed in part
a for g. Do not round any other intermediate calculations.
Input your answers as a percent rounded to 2 decimal
places.)
|
|
|
Weighted Cost |
| Debt |
8.26 |
% |
| Preferred stock |
|
|
| Common equity |
|
c. Calculate the 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.) |
|
|
|
Weighted Cost |
| Debt |
|
% |
| Preferred stock |
|
|
| Common equity |
|
|
| Weighted average cost of
capital |
0.00 |
% |
|