Question

HBM, Inc has the following capital structure: Assets $ 600,000 Debt $ 240,000 Preferred stock 60,000 Common stock 300,000 The common stock is currently selling for $12 a share, pays a cash dividend of $0.55 per share, and is growing annually at 4 percent. The preferred stock pays a $9 cash dividend and currently sells for $96 a share. The debt pays interest of 8.5 percent annually, and the firm is in the 30 percent marginal tax bracket.

What is the after-tax cost of debt? Round your answer to two decimal places. %

What is the cost of preferred stock? Round your answer to two decimal places. %

What is the cost of common stock? Assume that the current $0.55 dividend grows by 4 percent during the year. Round your answer to two decimal places. %

What is the firm’s weighted-average cost of capital? Round your answer to two decimal places.

Answer 1

1)

After tax cost of debt = 0.085 (1 - 0.3)

After tax cost of debt = 0.0595 or 5.95%

2)

Cost of preferred stock = (Annual dividend / price) * 100

Cost of preferred stock = (9 / 96 ) * 100

Cost of preferred stock = 9.38%

3)

Cost of common equity = (D1 / share price) * 100

Cost of common equity = [(0.55 * 1.04) / 12] + 0.04

Cost of common equity = 0.04767 + 0.04

Cost of common equity = 0.0877 or 8.77%

4)

Total market value of capital structure = 600,000

WACC = (240,000 / 600,000)*0.0595 + (60,000 / 600,000)*0.0938 + (300,000 / 600,000)*0.0877

WACC = 0.0238 + 0.00938 + 0.04385

WACC = 0.0770 or 7.70%