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# Changes in costs and weighted average cost of capital

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The attached table is needed in this problem....

Carr Auto Parts is trying to calculate it's cost of capital for use in a capital budgeting decision.Mr.Horn, the vice president of finance, has given you the following information and has asked you to compute the weighted average cost of capital.

The company currently has outstanding a bond with a 12 percent coupon rate.The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 14%.Carr's common stock has a price of \$30 and an expected dividend (D1) of \$1.30 per share.
The firm's historical growth rate of earnings and dividents per share has been 15.5%, but security analysts on Wall Street expect this growth to slow to 12% in the future.
Carr's preffered stock is selling at \$60 per share and carries a dividend of \$6.80 per share.The corporate tax rate is %30.The flotation costs are %3 of the selling price for the preffered stock.

The optimum capital structure for the firm seems to be 45% debt, 5% preffered stock, and 50% common equity in the form of retained earnings.

Compute the cost of capital for the individual components in the capital structure, and then calculate the weighted average cost of capital(similar to table11-1)

#### Solution Preview

We first need to calculate the cost of each component of capital and then the proportion to get the WACC.

For debt we take the cost as the current rate available in the market which is 14%. The tax rate is 30%. The after tax cost of debt is ...

#### Solution Summary

The solution explains how to calculate the weighted average cost of capital for Carr Auto Parts

\$2.49