Share
Explore BrainMass

Cypress Corporation has a target capital structure of 60% de

10.
Cypress Corporation has a target capital structure of 60% debt, 15% preferred stock, and 25% common stock. Currently Cypress has a capital structure of 75% debt, 10% common stock, and 15% preferred stock. The after tax cost of debt is 6%. The preferred stock has a par value of $100 per share, a $9 per share dividend, and a market price of $80 per share. The common stock of Cypress trades at $84 per share and has a projected dividend (D1) of $3.36. The stock price and dividend are expected to continue to grow at 12% for the foreseeable future. The CFO expects the company to have $590,000 available from retained earnings.

What is the weighted average cost of capital (WACC) for Cypress?

a. 8.95%

b. 9.29%

c. 9.41%

d. 11.08%

Solution Preview

You need to know the cost of preferred stock and the cost of equity to determine the WACC for this problem.

Preferred stock:

Kp = ...

Solution Summary

Cypress Corporation has a target capital structure of 60% debt, 15% preferred stock, and 25% common stock. Currently Cypress has a capital structure of 75% debt, 10% common stock, and 15% preferred stock. The after tax cost of debt is 6%. The preferred stock has a par value of $100 per share, a $9 per share dividend, and a market price of $80 per share. The common stock of Cypress trades at $84 per share and has a projected dividend (D1) of $3.36. The stock price and dividend are expected to continue to grow at 12% for the foreseeable future. The CFO expects the company to have $590,000 available from retained earnings.

What is the weighted average cost of capital (WACC) for Cypress?

a. 8.95%

b. 9.29%

c. 9.41%

d. 11.08%

$2.19