Question

Given the following information:

Percent of capital structure:

Debt	20	%
Preferred stock	10
Common equity (retained earnings)	70

  

Additional information:  

Bond coupon rate		14%
Bond yield to maturity		12%
Dividend, expected common	$	2.00
Dividend, preferred	$	9.00
Price, common	$	45.00
Price, preferred	$	100.00
Flotation cost, preferred	$	7.50
Growth rate		9%
Corporate tax rate		35%

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

Weighted cost of each source of capital

	Weighted Cost
Debt	1.56%
Preferred Stock	0.97%
Common Equity	9.41%
Weighted average cost of capital	11.94%

Cost of Debt

Cost of Debt = Bonds Yield x (1 – Tax Rate)

= 12.00% x (1 – 0.35)

= 12.00% x 0.65

= 7.80%

Weighted Cost = 1.56% [7.80% x 0.20]

Cost of Preferred Stock

Cost of Preferred Stock = Preferred Dividend / [Price of Preferred stock – Flotation cost]

= [$9.00 / ($100.00 - $7.50)]

= [$9.00 / $92.50]

= 0.0973 or

= 9.73%

Weighted Cost = 0.97% [9.73% x 0.10]

Cost of Common Stock

Using Dividend Discount Model, the Cost of Common Stock = [D1 / P0] + g

= [$2.00 / $45.00] + 0.09

= 0.0444 + 0.09

= 0.1344 or

= 13.44%

Weighted Cost = 9.41% [13.44% x 0.70]

Weighted Average Cost of Capital

= Weighed Cost of Debt + Weighted Cost of Preferred stock + Weighted cost of Common Stock

= 1.56% + 0.97% + 9.41%

= 11.94%

“Hence, the Hamilton Corp.'s weighted average cost of capital will be 11.94%”