Question

Given the following information, calculate the following measures: The cost of debt for this company, the...

  1. Given the following information, calculate the following measures: The cost of debt for this company, the cost of preferred equity, the cost of common equity, and WACC
  • A 20-year, $1000 par value bond with a 4% annual coupon bond sells for $1,113.
  • Preferred stock pays $8 per year and has a selling price of $75.8?
  • Stock’s beta is 1.1, the 30 day T-bill rate is 3%, the market risk premium is 7%, equity-bond RP is 7%, the common stock dividend payment at the end of year 1 is $5, the stock price is $60, and the dividend growth rate is 6%, tax rate of 20%.
  • Target weights: 40%, 10%, 50%
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Homework Answers

Answer #1

1.
Cost of Debt

Using financial calculator
N=20
PMT=4%*1000
PV=-1113
FV=1000
CPT I/Y=3.22%

2.
Cost of Preferred Equity

=Preferred Dividend/Price

=8/75.8
=10.55%

3.
Cost of Equity

Using DDM
=Expected Dividend/Current Price+Dividend growth
=5/60+6%
=14.333%

Using CAPM:
=risk free rate+beta*market risk premium
=3%+1.1*7%
=10.70%

Using Bond yield plus risk premium
=3.22%+7%
=10.22%

Average=(14.33%+10.70%+10.22%)/3=11.75%

4.
=40%*3.22%+10%*10.55%+50%*11.75%
=8.22%

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