Calculating the Weighted Average Cost of Capital WACC
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Rose Corp., a privately-owned company, is going public soon. After the IPO, the company expects its total assets to be $50 million. It plans to raise $25 million by selling 12%, 20-year bonds at par. Rose also anticipates selling $5 million of preferred stock, with each share ($100 par value) receiving an annual dividend of $13.50. Although the preferred shares will be sold to investors at par, the issuer will pay 4% in flotation costs to the investment banker.
Rose plans to issue $20 million of common stock, at $15 each in the IPO. Flotation costs are expected to be $1.25 per share. Management believes the company will be able to pay a dividend of $ 1.50 per share at the end of the year and that the dividend can grow 6% per year. The company's combined federal and state tax rate is 40%.
Calculate the firm's weighted average cost of capital (WACC).
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Solution Summary
The solution is in word document format that shows the step by step calculation of the Weighted Average Cost of Capital. The calculations shows the calculation of the components of the Weighted Average Cost of Capital such as the after tax cost of debt, cost of preferred stock, and cost of common stock. All formulae are shown
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1) After-tax Cost of Debt:
= 12% × (1-T) = 12% × (1-0.4) = 12% × 0.6 = 7.2%
Amount of Debt = $25,000,000
Weight of Debt = = ...
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