Question

Torrance, Inc. wishes to invest in a new project. Please utilize the below information to calculate the firm’s Weighted Average Cost of Capital, which Torrance, Inc. will use as the project’s discount rate.

1. Tax rate = 35%
2. Torrance, Inc. bonds currently have a semi-annual 20-year maturity, a 10% coupon with $1,000 par value, and the bonds current price is $1,350.
3. Torrance, Inc. holds 10%, $100 par value, annual dividend, perpetual preferred stock, which sells for $120.
4. Torrance, Inc.’s beta is 1.24; the risk-free rate is 4%, and the market risk premium is 5%.
5. The firm’s target capital structure is 35% debt, 10% preferred stock, and 55% common equity.

Please calculate Torrance, Inc.’s current cost of debt.

Please calculate Torrance, Inc.’s current cost of preferred stock.

Please calculate Torrance, Inc.’s current cost of common stock.

Please calculate Torrance, Inc.’s weighted average cost of capital.

Answer 1