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Cost Of Capital: Bond Debt, Preferred stock, Common equity and WACC

The bond issues outstanding are

150 million of 10% series.........2021
50 million of 7% series...........2015
75 million of 5% series..........2011

The companies planning to sell $75 million of bond for next year to replace the debt due to expire 2008. Present market yield for similar BAA rated bonds is 12.1%. Company has 90 million of 7.5% non-collateral preferred stock outstanding. The preferred stock is currently priced at 80 per-share and dividend per-share as $7.80. Dividend growth rate is 8% for common stock; expected dividend $1.90 and selling $40 per share. Flotation cost $2.50 per share for preferred stock and $2.20 per share for common stock. Company has kept debt at 50% of assets and equity at 50%. The corporate tax rate 40%.

Compute and show formula:

A) Bond (debt)
B) Preferred stock
C) Common equity in the form of retained earnings
D) New common stock
E) WACC

Solution Preview

Solution to Posting Number 441111:

A. Bond (Debt)/Cost of Debt Using Yield to Maturity Method:
After -Tax Cost of Debt = Kd(1-t)
Debt Market Value(Millions) % of Total Yield to Maturity Weighted Costs
Series?2021 $150 42.86% 10% 4.29%
Series?2015 $50 14.29% 7% 1.00%
Series?2011 $75 21.43% 5% 1.07%
Series ?2008 Repl. $75 21.43% 12.1% 2.59%
TOTAL $350 100% 8.98%

Weighted Average cost of debt before Taxes = 8.95%
Adjustment for Income Taxes (1-0.4=0.6) = X 0.6
Weighted Average cost of debt after Income Taxes = 5.37%

B. Preferred Stock

Kp = Dp
Pp - F

Kp = ...

Solution Summary

The cost Of capital computations for bond (debt), preferred stock, common equity and WACC is determined.

$2.19