Question

Testbank, Question 12 A firm has a capital structure that uses 45 percent equity, 20 percent preferred shares, and 35 percent debt. The preferred shares have a current yield of 5.5 percent. The debt has a coupon rate of 10 percent and a current yield to maturity of 6.5 percent. The common shares have a yield of 8 percent. There are no taxes. What is the firm’s WACC? 6.575% 6.975% 7.275% 8.200%

Answer #1

Information provided:

Weight of equity= 45%

Weight of preference shares= 20%

Weight of debt= 35%

Yield of common shares= 8%

Yield of preference shares= 5.50%

Yield to maturity= 6.5%

The weighted average cost of capital is calculated using the below formula:

WACC=Wd*Kd(1-t)+Wps*Kps+We*Ke

where:

Wd= Percentage of debt in the capital structure.

Kd= The before tax cost of debt

Wps= Percentage of preferred stock in the capital structure

Kps=Cost of preferred stock

We**=**Percentage of equity in the capital
structure

Ke= The cost of common equity.

T= Tax rate

WACC= 0.35*6.50% + 0.20*5.50% + 0.45*8%

= 2.2750 + 1.10 + 3.60

= **6.9750%**

Hence the answer is **option b.**

In case of any query, kindly comment on the solution.

Testbank, Question 14 A firm has a capital structure that uses
45 percent equity, 20 percent preferred shares, and 35 percent
debt. The preferred shares have a current yield of 5.5 percent. The
debt has a coupon rate of 10 percent and a current yield to
maturity of 6.5 percent. The common shares have a yield of 8
percent. The tax rate is 25 percent. What is the firm’s WACC?
5.231% 6.700% 6.406% 6.975%

Testbank, Question 10 MinMax Corp has the following capital
structure: 55% equity (giving a return of 9%), 10% preferred shares
(with a yield of 6%), and 35% debt (with a coupon rate of 10% and
yield to maturity of 6.5%). If there are no taxes, what is the
firm’s WACC? 10.333% 9.050% 7.825% 6.915%

Testbank, Question 16 A firm has 2 million shares outstanding,
which are currently trading at $45 per share and have a dividend
yield of 10 percent. The firm also has $40 million of 6 percent
bonds outstanding that are currently trading at 110, with a yield
to maturity of 3 percent. There are no preferred shares and no
taxes. What is the WACC? 7.70% 7.85% 8.69% 8.77%

Percent of capital structure:
Debt
35
%
Preferred stock
20
Common equity
45
Additional information:
Bond coupon rate
11%
Bond yield to maturity
9%
Dividend, expected common
$
5.00
Dividend, preferred
$
12.00
Price, common
$
60.00
Price, preferred
$
120.00
Flotation cost, preferred
$
3.80
Growth rate
8%
Corporate tax rate
40%
Calculate the Hamilton Corp.'s weighted cost of each source of
capital and the weighted average cost of capital.
Weighted Cost
Debt=
Preferred stock=
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