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Weighted avergage cost of capital for internal and external funds

Given the following information, calculate the WACC

Percent of capital structure:
Debt 55%
Common Equity 5
Preferred stock 40

Additional info:
Bond coupon rate 8.5%
Bond yield 7%
Bond flotation cost 2%
Dividend, expexted common $1.50
Price, common $30.00
Dividend, preferred 5%
Flotation cost, preferred 3%
Flotation cost, common 4%
Corporate growth rate 6%
Corporate tax rate 35%

a) Calculate the cost of capital assuming use of internally generated funds
b) Calculate the cost of capital assuming use of externally generated funds
c) Why is there a difference? Why does only common equity change?

Solution Preview

Given the following information, calculate the WACC

Percent of capital structure:
Debt 55%
Common Equity 5
Preferred stock 40

Additional info:
Bond ...

Solution Summary

The solution determines the weighted average cost of capital for internal and external funds. The cost of capital assuming use of internally and externally generated funds is calculated.

$2.19