Question

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=

Common equity=

Weighted average cost of capital=

Answer 1

Answer of Part 1:

Before Cost of Debt = 9%

After Cost of Debt = After Cost of Debt * (1 – tax rate)
After Cost of Debt = 9% * (1 – 0.40)
After Cost of Debt = 5.40%

Answer of Part 2:

Cost of Preferred Stock = Annual Dividend / (Price – Flotation Cost) * 100
Cost of Preferred Stock = $12 / ($120 - $3.80) * 100
Cost of Preferred Stock = $12 / $116.2 * 100
Cost of Preferred Stock = 10.33%

Answer of Part 3:

Cost of Common Equity = D1/ P0 + g
Cost of Common Equity = $5 / $60 + 0.08
Cost of Common Equity = 0.0833 + 0.08
Cost of Common Equity = 0.1633 or 16.33%

Answer of Part 4:

Weight of Debt = 0.35

Weight of Preferred Stock = 0.20

Weight of Common Equity = 0.45

WACC = Weight of Debt * After Cost of Debt + Weight of Preferred Stock * Cost of Preferred Stock + Weight of Common Equity * Cost of Common Equity
WACC = 0.35 * 5.40% + 0.20 * 10.33% + 0.45 * 16.33%
WACC = 11.30%