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Calculation of WACC

A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions:

Source of Capital Target Market
Long-term debt 30%
Preferred stock 5
Common stock equiTY 65
Debt: The before-tax cost of debt is 9.33%.
Preferred Stock: The firm has determined it can issue preferred stock at $65 per share. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: The firm's common stock is currently selling for $40 per share. The dividend expected to be paid at the end of the coming year (i.e., D1) is $5.07. The firm's dividend payments are expected to grow at at a constant rate of 8% in the future. The firm must pay $2 per share in flotation costs.

What is the firm's weighted average cost of capital assuming the firm has exhausted all retained earnings? (Points :3)
A. 10.2%
B. 12.6%
C. 14.8%
D. 16.2%

Solution Preview

Cost of Debt Kd = 9.33%

Cost of Preferred Stock Kp:
Pp = $ 65
Dp = $ 8
Sc = $ 3
Kp = Dp / (Pp - ...

Solution Summary

The solution provides a clear step by step solution for the weighted average cost of capital. All steps have been clearly provided with complete working and assumptions.