Capital Costs and Security
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Consider the data on the following data, calculate the individual costs for each security and the weighted average cost of capital. Then comment on your findings.
Percent of capital structure:
Debt 30%
Preferred stock 15
Common equity 55
Additional information:
Bond coupon rate 13%
Bond yield to maturity 11%
Dividend, expected common $3.00
Dividend, preferred $10.00
Price, common $50.00
Price, preferred $98.00
Flotation cost, preferred $5.50
Growth rate 8%
Corporate tax rate 30%
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Solution Summary
This solution explains the basic concepts of rate of return in investments, cost of capital, equity, and capital asset pricing model to calculate the individual costs for each security and the weighted average cost of capital. All steps are shown in an Excel file.
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Some basic concepts,
A firm's long-term success depends upon the firm's investments earning a sufficient rate of return. This sufficient or minimum rate of return necessary for a firm to succeed is called the cost of capital.
The cost of capital can also be viewed as the minimum rate of return required keeping investors satisfied. Thus it is used to know the rate of return expected ...
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