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Johnson Industries Cost of Capital

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Johnson Industries provides the following information on the company's common stocks, preferred stocks and bonds:

The company can issue a bond at yield to maturity of 7.85%.
The company pays a dividend on preferred stock of $4.76.
The company just issued a dividend of $5.00 on its common stock. They anticipate that dividends will grow at a constant rate of 5% indefinitely.
The risk-free rate is 6.25%.
The required return on the market is 13.25%.
Johnson's Industries' beta is 1.20.
Preferred stock is currently selling for $68.00.
The company's tax rate is 32%.
The company has 200,000 of $1000 face value bonds currently trading at 98% of par value.
The company has 1.8 million shares of preferred stock outstanding.
The company has 6.8 million shares of common stock outstanding.

Based upon the information provided above, compute the weighted average cost of capital (WACC).

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Solution Preview

Johnson Industries provides the following information on the company's common stocks, preferred stocks and bonds:

The company can issue a bond at yield to maturity of 7.85%.
The company pays a dividend on preferred stock of $4.76. ...

Solution Summary

The response provides steps to compute the Cost of Capital. The issues on common stocks are determined.

$2.19
See Also This Related BrainMass Solution

This question deals with review of the financial management policies and practices of Johnson and Johnson over the past two years. Also it calculates the important financial ratios.

Calculate the FINANCIAL & MARKET RATIOS for the year ended 31/12/07 & 31/12/06

Critically evaluate and comment on the results - Spotlight the areas the management should focus more

- Calculate k (cost of equity) by applying both the Gordon's Growth Model and the CAPM.
- Calculate the cost of each component of Capital for JNJ and the weighted cost of capital (WACC)

Then

Review the Financial Management policies and practices of JNJ over the past two years. Visit the website of the company.

Critically evaluate the financial management effectiveness of the company by commenting on:

- working capital policies
- dividend policies
- gearing policies
- risk management policies
- investment

Present your own suggestion on what changes you think might improve these principles.

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