Weighted Average Cost of Capital
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Consider the data on the following data, calculate the individual costs for each security and the weighted average cost of capital. Then comment on your findings.
Percent of capital structure:
Debt 30%
Preferred stock 15
Common equity 55
Additional information:
Bond coupon rate 13%
Bond yield to maturity 11%
Dividend, expected common $3.00
Dividend, preferred $10.00
Price, common $50.00
Price, preferred $98.00
Flotation cost, preferred $5.50
Growth rate 8%
Corporate tax rate 30%
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Solution Summary
The solution explains the calculation of individual cost of the capital of the various components and then the weighted average cost of capital (WACC)
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Cost of debt is present yield to maturity (YTM) since that is the interest rate that the investors are demanding. For a firm, since interest is tax deductible, cost of debt is the after tax cost.
YTM =11%
Tax rate=30%
After cost of debt=11% *(1-0.3)=7.7%
Since the preferred stock is a perpetuity, its ...
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