Question

8. Roll Tide, Inc. has 10,000 shares of common stock outstanding at a price of $18 a share. The firm’s beta is 1.3 and the market risk premium is 6.5%. The Treasury bill rate is 3.5%. There are 9,000 shares of preferred stock outstanding at a price of $22 a share; each quarterly dividend payment on preferred stock is $0.45. Roll Tide’s has 400 bonds 15 year bonds which have 6 years left to maturity. They pay a coupon rate of 7% and are trading at 105% of par. The tax rate is 34 percent. What is the weighted average cost of capital for the firm? (10 points)

Answer 1

cost of equity=3.5%+1.3*6.5%=11.95%

cost of preferred stock=(0.45*4)/22=8.18%

for cost of debt, use excel function=RATE(nper,pmt,pv,fv)

cost of debt=RATE(nper,pmt,pv,fv)=RATE(6,1000*7%,-1000*105%,1000)=5.98%

Value of equity=10000*18=180000

value of preferred shares=9000*22=198000

value of debt=400*1000*105%=420000

total capital value=180000+198000+420000=798000

the weighted average cost of capital for the firm=(180000/798000)*11.95%+(198000/798000)*8.18%+(420000/798000)*5.98%*(1-34%)

=6.80%

the above is answer..

answered by: anonymous