Question

# Given the following information: Percent of capital structure:    Debt 25 % Preferred stock 15 Common...

Given the following information:

Percent of capital structure:

 Debt 25 % Preferred stock 15 Common equity 60

 Bond coupon rate 9% Bond yield to maturity 7% Dividend, expected common \$ 3.00 Dividend, preferred \$ 10.00 Price, common \$ 50.00 Price, preferred \$ 116.00 Flotation cost, preferred \$ 8.50 Growth rate 6% 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:

cost of debt=7% --- yield to maturity

after tax cost of debt =cost of debt*(1-tax rate)=7*(1-.3)=4.9%

after tax weighted cost of debt= percentage of capital*after tax cost of debt

=.25*4.9=1.225%

Common Equity:

cost of equity = D1/P(1-F) + g

where D1=dividend expected ; P=Price of share ; F=Floatation cost ; g=growth rate

cost of equity= 3/50 + .06 =12%

weighted cost of equity =.6*12=7.2%

Preferred equity:

cost of preferred equity = D1/P(1-F)

where D1=dividend ; P=Price of share ; F=Floatation cost ;

cost of preferred equity= 10/(116*(1-.085)) =9.42%

weighted cost of preferred share= .15*9.42% =1.413%

WACC= sum of (weighted cost of capitals)

=1.225+7.2+1.413= 9.838%

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