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Weighted (marginal) cost of capital

Brick Stone, Inc., has the following capital structure:

Financing Source: Proportion of Capital Structure:
a). Debentures (9% coupon, $1,000 par value, 27%
12 year maturity)
b). Preferred stock ($2 dividend, $25 par value) 8%
c). Common Equity 65%
d). Total 100%

Brick Stone expects to raise future capital in the proportions currently indicated on the balance sheet.
The current market price for Brick Stone is $1,075. If new debentures were sold, the issuance cost would be $20 per bond.
The current market price for the preferred stock is $19. Issuance cost on new equity would be $2.50 per share.
The current market price for Brick Stone's common stock is $40.
The stock pays a current (Do) dividend of $3. This dividend is expected to grow at an annual rate of 7%.

What is the weighted (marginal) cost of capital for Brick Stone, assuming new capital is raised in the proportions shown here and that all new equity comes from the sale of new shares, new debt come from the sale of debentures, and new preferred comes from the sale of preferred stock? Interpret what this specific WACC number means to the firm and explain how it should be used by the firm. The firm's marginal tax rate is 40%.

Be sure to show all work and clearly label all variables (for example, if you use kd in an equation, explain that it represents the before-tax cost of debt). Make your final answer clear and understandable.

Solution Summary

The solution explains the calculation of weighted (marginal) cost of capital

$2.19