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:
Preferred stock 15
Common equity 55
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%
Cost of debt is present yield to maturity (YTM) since that is the interest rate that the investors are demanding. The coupon rate is the historical cost of debt and we should use the current cost of debt.
For a firm, since interest is tax deductible, cost of debt is the after tax cost.
After cost of debt=11% ...
The solution explains the calculation of the component cost of capital and the weighted average cost of capital