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Compute: The Weighted Average Cost of Capital

I need help figuring this out.

The Accidental Petroleum Company is trying to determine its weighted average cost of capital for use in making a number of investment decisions. The firm's bonds were issued 6 years ago and have 14 years left until maturity. They carried an 8% coupon rate, and are currently selling for $962.50.

The firm's preferred stock carries a $4.60 dividend and is currently selling at $42.50 per share. Accidental's investment banker has stated that issue costs for new preferred will be 50 cents per share.

The firm has significant retained earnings, but will also need to sell new common stock to finance the projects it is now considering. Accidental Petroleum common stock is expected to pay a $2.50 per share dividend next year, and is expected to maintain an 8% growth rate for the foreseeable future. The stock is currently priced at $50 per share, but new common stock will have flotation costs of 60 cents per share.

Questions:
1.Calculate the cost of debt, Kd (omit the percent sign and take your answer to two decimal places.
2.Calculate the cost of preferred stock, Kp (omit the percent sign and take your answer to two decimal places).
3.Calculate the cost of new common stock, Kn (omit the percent sign and take your answer to two decimal places).

Solution Preview

** See attached file for complete details **

1.Calculate the cost of debt, Kd (omit the percent sign and take your answer to two decimal places

The cost of debt is the yield to maturity (YTM) on existing bonds. The YTM is the discounting rate that will make the present value of interest and ...

Solution Summary

This solution explains how to calculate the component costs of capital and the weighted average cost of capital. An Excel document is attached which contains the details for the required calculations.

$2.19