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Calculating Weighted Average Cost of Capital (WACC)

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If a company finances its projects with 40 percent debt, 10 percent preferred stock, and 50 percent common stock.

1) The company can issue bonds at a yield to maturity of 8.4 percent.
2) The cost of preferred stock is 9 percent.
3) The company's common stock currently sells for $30 a share.
4) The company's dividend is currently $2.00 a share (D0 = $2.00), and is
expected to grow at a constant rate of 6 percent per year.
5) Assume that the flotation cost on debt and preferred stock is zero, and no
new stock will be issued.

The company's tax rate is 30 percent.
What is the company's weighted average cost of capital (WACC)?

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Solution Preview

If a company finances its projects with 40 percent debt, 10 percent preferred stock, and 50 percent common stock.

1) The company can issue bonds at a yield to maturity of 8.4 percent.
2) The cost of preferred stock is 9 percent.
3) The company's common stock currently sells for $30 a share.
4) The company's dividend is currently $2.00 a share (D0 = $2.00), and is expected to grow at a constant rate of 6 percent per year.
5) Assume ...

Solution Summary

This solution is comprised of a detailed explanation to calculate WACC.

$2.19
See Also This Related BrainMass Solution

Calculate the weighted average cost of capital (WACC)

#1 Determine the weighted average cost of capital for a firm given the follow info below:

Equity : $200,000 shares;stock price of $73
Beta of 1.54; risk free rate of 4%; risk premium of 6%

Debt info: Book value of $3 million; interest expense of $278,000; average maturity of 13 years; Pre-tax cost of debt of 6.5%; tax rate of 30%

#2 What is the weighted average cost of capital if stock falls to $65.70 (a 10% decline in price). Leave all other variables as the same before

#3 What is the weighted average cost of capital is stock prices fall for $65.70 and the beta of the firm rises to 1.60. Leave all other variables to same as before.

#4 Suppose the pre-tax costs of debt increases to 8% because of the fall in stock price and rise in systematic risk. Determine the weighted average cost of capital.

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