Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 7.5 percent. The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $65 a share. The common stock has a beta of 1.34 and sells for $42 a share. The cost of equity is 14.06 percent. The corporate tax rate is 38 percent. What is the firm's weighted average cost of capital?
WACC = Weighted avg cost of sources in capital structure.
After Tax cost of Debt = YTM ( 1 - Tax rate )
= 7.5% ( 1 - 0.038)
= 7.5% * 0.62
= 4.65%
| Particulars | Qty | Price | Value | Weight | Cost | Wt Cost |
| Bond | 80000 | $ 100.00 | $ 80,00,000.00 | 4.95% | 4.65% | 0.23% |
| Pref Shares | 750000 | $ 65.00 | $ 4,87,50,000.00 | 30.14% | 7% | 2.11% |
| Equity | 2500000 | $ 42.00 | $ 10,50,00,000.00 | 64.91% | 14.06% | 9.13% |
| WACC | 11.47% |
Assumptions:
Bond Face Value = $ 100
Cost of Pref share = 7% ( as Face value is not provided).
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