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(TCO 4) Given the following information, calculate the weighted average cost for the Han Corp. Percent...

(TCO 4) Given the following information, calculate the weighted average cost for the Han Corp. Percent of capital structure: Preferred stock 10% Common equity 60% Debt 30% Additional information: Corporate tax rate 34% Dividend, preferred $9.00 Dividend, expected common $3.50 Price, preferred $102.00 Growth rate 6% Bond yield 10% Flotation cost, preferred $3.20 Price, common $70.00

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Answer #1

Calculation of WACC for Han Corp,

Cost of equity = (D1/P0)+g

Where D1 = expected dividend for next year

P0 Value of equity today = $70

D1 = Profit of the organisation. = $3.50

g = growth rate = 6%

Ke = ($3.50/70) +0.06 = 0.11 or 11%

Cost of preferred stock:

Kp = D/(P0-floatation cost) = $9/($102-3.$20) = 0.911 or 0.911%

Cost of debt = 10%

WACC = Weight of Debt* cost of debt* (1-t) + Weight of Preferred stock * cost of preferred stock + weight of equity * cost of equity = 0.30*o.10*(1-0.34) + o.60 * 0.11 + 0.10 * 0.0911 = 0.09491 or 9.50%

Hence wacc is 9.5%

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