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# Component cost and 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 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

#### Solution Preview

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

\$2.19