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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 intermediate calculations and round your final answers to 2 decimal places.) Weighted Cost Debt (Kd) % Preferred stock (Kp) Common equity (Ke) Weighted average cost of capital (Ka) %

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Answer #1

Solution :-

Cost of Debt (kd) = Bond Yield * ( 1 - tax )

= 8% * ( 1 - 0.40 ) = 4.8%

Cost of Prefrence share = Preference dividend / ( Price - flotation cost )

= $13 / ( $138 - $5.20 )

= 0.09833

= 9.833%

Cost of equity ( ke) = ( Dividend / Price ) + growth

= ( $6 / $65 ) + 0.05

= 0.1423

= 14.23%

Now Weighted average cost of capital ( Ko )

= ( 0.35 * 4.8% ) + ( 0.20 * 9.833% ) + ( 0.45 * 14.23% )

= 1.68% + 1.967% + 6.40%

= 10.05%

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