4.) Shortroad Inc. has the following target capital structure:
Debt 30%
Preferred stock 15%
Common stock 55%
Total capital 100%
Stockholders expect earnings and dividends to grow at a constant rate of 8 percent in the future. Shortroad's tax rate is 34 percent. Treasury bonds yield 5 percent and the market risk premium is 8 percent. Shortroad has a beta of 1.4. The following information is also available:
Common stock: It is assumed that no new common stock would be issued.
Preferred stock: New preferred stock could be sold to the public at a price of $100 per share, with a dividend of $10. Flotation costs of $5 per share would be incurred.
Debt: Shortroad's 15-year 10% semiannual coupon bonds ($1,000 par value) are currently selling for $1,207.50.
a) Find the component cost of debt
b) Find the component cost of preferred stock
c) Find the component cost of common equity using the CAPM model
d) Find the firm's WACC

4.) Shortroad Inc. has the following target capital structure:
Debt 30%
Preferred stock 15%
Common stock 55%
Total capital 100%
Stockholders expect earnings and dividends to grow at a constant rate of 8 percent in the future. Shortroad's tax rate is 34 percent. Treasury bonds yield 5 percent and the market risk premium is 8 percent. Shortroad has a beta of 1.4. The following information is also available:
Common stock: It is assumed that no new common stock would be issued.
Preferred stock: New preferred stock could be ...

Solution Summary

The solution explains how to calculate the component cost of capital and the weighted average cost of capital

What are the components of WACC? Which component has the most significance in the total? Over which component does management have the greatest influence?

A firm has a capital structure with 40% debt, 50% equity, and 10% preferred stock. If the following information is given, calculate company's WACC.
YTM on firm's bond is 7.2%
Beta is 1.2; risk free rate 5%; market risk premium is 5%
Preferred stock pays dividend of $8 and sells for $100

A Corp. has no debt but can borrow at 8 %. The firm's WACC is currently 12% and has tax rate of 35%.
a. What is the cost of equity?
b. If the Corp. converts to 25 % debt,what will cost of equity be? 50 %?
c. What is shadow's WACC for part b: 25 % and 50 %.

I need your help with this problem. How do I calculate WACC; Reactive Industries has the following capital structure. Its corporate tax rate is 35 percent. What is its WACC?
SECURITY MARKET VALUE REQUIRED RATE OF RETURN
DEBT $20 Million 6%
PREFERRED STOCK $10 Million

14. To help finance a major expansion, Castro Chemical Company sold a noncallable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semiannually, sells at a price of $850, and has a par value of $1,000. If the firm's tax rate is 40%, what is the componentcost of debt for use in

If a firm's capital structure is 40% debt, 10% preferred stock, and 50% common stock, their tax rate is 40%, and this Kd = 9%, Kp = 5%, and Ks = 12%, what is the firm's WACC? Also, show the formula and entries on a financial calculator.

Which of the following statements is correct?
Because we often need to make comparisons among firms that are in different income tax brackets, it is bes to calculate the WACC on a before-tax basis
If a firm has been suffering accounting losses and is expected to continue suffering such losses (and therefore its tax rate is

a. What is meant by Weighted Average Cost of Capital (WACC)?
b. What are the components of WACC?
c. Why is WACC a more appropriate discount rate when doing capital budgeting?
d. What is the impact on WACC when an organization needs to raise long term capital?

If a firm has a balance sheet with 50% debt and 50% equity, cost of debt of 6%, tax rate of 35%, and a cost of equity of 12%, what is the firms weighted average cost of capital?

Smith and Jones Widget company has total capital, consisting of long-term debt and common equity of $80 million. Thirty-two million of total capital is in the form of long-term debt, which carries a cost of 12 percent. The company's equity carries a cost of 19.50 percent. If the company's tax rate is 38 percent, what is the W