Question

Given the following information:

Percent of capital structure:

  

Debt	25	%
Preferred stock	15
Common equity	60

  

Additional information:  

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.)
  

Answer 1

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%