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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 Preview

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 ...

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)