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%**

Problem 11-23 Weighted average cost of capital [LO11-1]
Given the following information:
Percent of capital structure:
Preferred stock
20
%
Common equity
60
Debt
20
Additional information:
Corporate tax rate
40
%
Dividend, preferred
$
11.00
Dividend, expected common
$
6.50
Price, preferred
$
107.00
Growth rate
9
%
Bond yield
8
%
Flotation cost, preferred
$
7.50
Price, common
$
91.00
Calculate the weighted average cost of capital for Digital
Processing Inc. (Do not round intermediate calculations.
Input your...

Given the following information: Percent of capital
structure:
Preferred
stock
20
%
Common
equity
40
Debt
40
Additional information:
Corporate tax
rate
34
%
Dividend,
preferred
$
8.50
Dividend,
expected common
$
2.50
Price,
preferred
$
105.00
Growth rate
7
%
Bond yield
9.5
%
Flotation cost,
preferred
$
3.60
Price,
common
$
75.00
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...

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Percent of capital structure:
Preferred stock 20 %
Common equity 40
Debt 40
Additional information:
Corporate tax rate 34 %
Dividend, preferred $ 8.50
Dividend, expected common $ 2.50
Price, preferred $ 105.00
Growth rate 7 %
Bond yield 9.5 %
Flotation cost, preferred $ 3.60
Price, common $ 75.00
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Percent of capital structure:
Debt
10
%
Preferred stock
5
Common equity
85
Additional information:
Bond coupon rate
13%
Bond yield to maturity
11%
Dividend, expected common
$
7.00
Dividend, preferred
$
14.00
Price, common
$
70.00
Price, preferred
$
110.00
Flotation cost, preferred
$
2.50
Growth rate
4%
Corporate tax rate
30%
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Mr. Jeter, the vice-president of finance, has given you the
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Dividend, expected common $3.50 Price, preferred $102.00 Growth
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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%
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Percent of capital structure:
Debt
30
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Preferred stock
10
Common equity
60
Additional information:
Bond coupon rate
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Bond yield to maturity
14%
Dividend, expected common
$
8.00
Dividend, preferred
$
15.00
Price, common
$
75.00
Price, preferred
$
112.00
Flotation cost, preferred
$
6.50
Growth rate
3%
Corporate tax rate
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Percent of capital structure:
Debt
20
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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
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