Explore BrainMass

Explore BrainMass

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

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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

    © BrainMass Inc. brainmass.com October 10, 2019, 3:54 am ad1c9bdddf

    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.