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Corporate Finance (Weighted Average Cost of Capital)

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You have been asked to calculate the weighted average cost of capital for Future Flow Enterprises (FFE) and have been provided with the following information to complete the task.

 The company's effective tax rate is 40%
 FFE currently has a bond issue outstanding, with a market price of $1,136.28 per $1,000 face value. Each bond pays 8% interest, with interest paid semi-annually.
There are 14 years remaining until maturity on this issue
 FFE has 100,000 preferred shares outstanding, with a stated dividend of $10.50 per share, and an average issue price of $105.00 per share. The current market price of these shares is $113.45
 FFE common shares currently trade at $50.00 per share. Its last dividend was $4.15 per share, and dividends are expected to grow at a constant rate of 4.00% for the foreseeable future.
 FFE's target capital structure is 30% debt, 10% preferred equity and the balanceas common equity
 FFE estimates that retained earnings will be $250,000 for the coming year

Based on this information what is the weighted average cost of capital for FFE (round all calculations to 4 decimal places)?

a. 0.0395
b. 0.0657
c. 0.0716
d. 0.0793
e. 0.0833

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Solution Summary

The weighted average cost of capitals for corporate finance is examined.