Question

Problem 11-23 Weighted average cost of capital [LO11-1] Given the following information: Percent of capital structure: Preferred stock 20 % Common equity 50 Debt 30 Additional information: Corporate tax rate 40 % Dividend, preferred $ 7.00 Dividend, expected common $ 3.50 Price, preferred $ 98.00 Growth rate 8 % Bond yield 10 % Flotation cost, preferred $ 3.40 Price, common $ 86.00 Calculate the weighted average cost of capital for Digital Processing Inc. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

Answer 1

Preferred price after flotation cost = 98 - 3.4 = 94.6

Cost of preferred stock = (D / price) * 100

Cost of preferred stock = (7 / 94.6) * 100

Cost of preferred stock = 7.3996%

Cost of equity = (D1 / share price) + growth rate

Cost of equity = (3.5 / 86) + 0.08

Cost of equity = 0.1207 or 12.07%

Weighted average cost of capital = 0.2*0.073996 + 0.5*0.1207 + 0.3*0.1*(1 - 0.4)

Weighted average cost of capital = 0.0148 + 0.06035 + 0.018

Weighted average cost of capital = 0.0932 or 9.32%