Question

A-Rod Manufacturing Company is trying to calculate its cost of
capital for use in making a capital budgeting decision. Mr. Jeter,
the vice-president of finance, has given you the following
information and has asked you to compute the weighted average cost
of capital.

The company currently has outstanding a bond with a 9.7 percent
coupon rate and another bond with an 7.3 percent rate. The firm has
been informed by its investment banker that bonds of equal risk and
credit rating are now selling to yield 10.6 percent. The common
stock has a price of $51 and an expected dividend
(*D*_{1}) of $1.71 per share. The historical growth
pattern (*g*) for dividends is as follows:

$ | 1.26 |

1.40 | |

1.55 | |

1.71 |

The preferred stock is selling at $71 per share and pays a dividend
of $6.70 per share. The corporate tax rate is 30 percent. The
flotation cost is 3.0 percent of the selling price for preferred
stock. The optimal capital structure for the firm is 25 percent
debt, 20 percent preferred stock, and 55 percent common equity in
the form of retained earnings.

**a.** Compute the historical growth rate. **(Do
not round intermediate calculations. Round your answer to the
nearest whole percent and use this value as g. Input your
answer as a whole percent.)**

**b.** Compute the cost of capital for the
individual components in the capital structure. **(Use the
rounded whole percent computed in part a for g. Do not
round any other intermediate calculations. Input your answers as a
percent rounded to 2 decimal places.) Calculate Debt, Preferred
stock and common equity.
**

**c.** Calculate the weighted cost of each source
of capital and the weighted average cost of capital. **(Do
not round intermediate calculations. Input your answers as a
percent rounded to 2 decimal places.)
Calculate debt, preferred stock, common equity and Weighted average
cost of capital.**

Answer #1

A-Rod Manufacturing Company is trying to calculate its cost of
capital for use in making a capital budgeting decision. Mr. Jeter,
the vice-president of finance, has given you the following
information and has asked you to compute the weighted average cost
of capital.
The company currently has outstanding a bond with a 10.9 percent
coupon rate and another bond with an 8.5 percent rate. The firm has
been informed by its investment banker that bonds of equal risk and
credit...

A-Rod Manufacturing Company is trying to calculate its cost of
capital for use in making a capital budgeting decision. Mr. Jeter,
the vice-president of finance, has given you the following
information and has asked you to compute the weighted average cost
of capital.The company currently has outstanding a bond with a 10.9
percent coupon rate and another bond with an 8.5 percent rate. The
firm has been informed by its investment banker that bonds of equal
risk and credit rating...

A-Rod Manufacturing Company is trying to calculate its cost of
capital for use in making a capital budgeting decision. Mr. Jeter,
the vice-president of finance, has given you the following
information and has asked you to compute the weighted average cost
of capital.
The company currently has outstanding a bond with a 11.0 percent
coupon rate and another bond with an 8.6 percent rate. The firm has
been informed by its investment banker that bonds of equal risk and
credit...

A-Rod Manufacturing
Company is trying to calculate its cost of capital for use in
making a capital budgeting decision. Mr. Jeter, the vice-president
of finance, has given you the following information and has asked
you to compute the weighted average cost of capital.
The company currently
has outstanding a bond with a 11.5 percent coupon rate and another
bond with an 9.1 percent rate. The firm has been informed by its
investment banker that bonds of equal risk and credit...

A-Rod Manufacturing Company is trying to calculate its cost of
capital for use in making a capital budgeting decision. Mr. Jeter,
the vice-president of finance, has given you the following
information and has asked you to compute the weighted average cost
of capital.
The company currently has outstanding a bond with a 9.6 percent
coupon rate and another bond with an 7.2 percent rate. The firm has
been informed by its investment banker that bonds of equal risk and
credit...

A-Rod Manufacturing Company is trying to calculate its cost of
capital for use in making a capital budgeting decision. Mr. Jeter,
the vice-president of finance, has given you the following
information and has asked you to compute the weighted average cost
of capital.
The company currently has outstanding a bond with a 11.0 percent
coupon rate and another bond with an 8.6 percent rate. The firm has
been informed by its investment banker that bonds of equal risk and
credit...

A-Rod Manufacturing Company is trying to calculate its cost of
capital for use in making a capital budgeting decision. Mr. Jeter,
the vice-president of finance, has given you the following
information and has asked you to compute the weighted average cost
of capital. The company currently has outstanding a bond with a
11.2 percent coupon rate and another bond with an 8.8 percent rate.
The firm has been informed by its investment banker that bonds of
equal risk and credit...

A-Rod Manufacturing Company is trying to calculate its cost of
capital for use in making a capital budgeting decision. Mr. Jeter,
the vice-president of finance, has given you the following
information and has asked you to compute the weighted average cost
of capital. The company currently has outstanding a bond with a
11.5 percent coupon rate and another bond with an 9.1 percent rate.
The firm has been informed by its investment banker that bonds of
equal risk and credit...

A-Rod Manufacturing Company is trying to calculate its cost of
capital for use in making a capital budgeting decision. Mr. Jeter,
the vice-president of finance, has given you the following
information and has asked you to compute the weighted average cost
of capital.
The company currently has outstanding a bond with a 9.6 percent
coupon rate and another bond with an 7.2 percent rate. The firm has
been informed by its investment banker that bonds of equal risk and
credit...

A-Rod Manufacturing Company is trying to calculate its cost of
capital for use in making a capital budgeting decision. Mr. Jeter,
the vice-president of finance, has given you the following
information and has asked you to compute the weighted average cost
of capital.
The company currently has outstanding a bond with a 10.4 percent
coupon rate and another bond with an 8.0 percent rate. The firm has
been informed by its investment banker that bonds of equal risk and
credit...

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