Purchase Solution

Weighted average cost of capital

Not what you're looking for?

Ask Custom Question

5. Given the following information, calculate the weighted average cost of capital for

Situation A and Situation B:

Situation A Situation B
Capital Structure
Common Stock 55% 30%
Preferred Stock 15% 15%
Debt 30% 55%

Additional information
Corporate tax rate 30% 30%
Dividend, common $2.75 $2.75
Price, common $68 $68
Dividend, preferred 10% 10%
Price, preferred $103 $103
Bond yield 11% 11%
Bond coupon rate 13% 13%
Flotation cost, preferred $4.50 $4.50
Growth rate 7.5% 7.5%

After you have calculated both weighted average cost of capital amounts, write a response that explains why the rates are different and what the advantages and disadvantages of both alternatives are.

Conclude with which capital structure you would recommend and why you selected that structure.

Purchase this Solution

Solution Summary

The solution explains the calculation of weighted average cost of capital for two capital structures

Solution Preview

Situation A and Situation B:

Situation A Situation B
Capital Structure
Common Stock 55% 30%
Preferred Stock 15% 15%
Debt 30% 55%

Additional information
Corporate tax rate 30% 30%
Dividend, common $2.75 $2.75
Price, common $68 $68
Dividend, preferred 10% 10%
Price, preferred $103 $103
Bond yield 11% 11%
Bond coupon rate 13% 13%
Flotation cost, preferred $4.50 $4.50
Growth rate 7.5% 7.5%

WACC = Proportion of debt X after tax cost of debt + Proportion of preferred stock X cost of preferred stock + Proportion of common stock X cost of common stock

The costs are

After tax cost of debt = 11% X (1-0.3) = 7.7% (we take the yield and not the coupon rate since yield represents the current required return of the bond holders)
Cost of ...

Purchase this Solution


Free BrainMass Quizzes
Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

Learning Lean

This quiz will help you understand the basic concepts of Lean.

Introduction to Finance

This quiz test introductory finance topics.

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.