13. Calculate Company C’s weighted average cost of preferred stock, given the fo

Question

13. Calculate Company C’s weighted average cost of preferred stock, given the following information: (a) Dividend on Preferred Stock: $4.25, (b) Price of Preferred Stock: $53.20, (c) Debt: $5,000,000, (d) Equity: $3,000,000, and (e) Preferred Stock: $500,000. 14. Calculate Company D’s weighted average cost of capital, given the following information: (a) Tax Rate: 22.5%, (b) Average Price of Outstanding Bonds: $982.20, (c) Coupon Rate (Debt): 5.3%, (d) NPER (Debt): 7, (e) Dividend: $2.30, (f) Growth Rate: 6.3%, (g) Price: $32.50, (h) Dividend on Preferred Stock: $3.25, (i) Price of Preferred Stock: $42.30, (j) Debt: $25,000,000, (k) Equity: $30,000,000, and (l) Preferred Stock: $10,000,000. 15. Calculate Company E’s weighted average cost of equity, given the following information: (a) Expected Return on the Market: 12%, (b) Beta for Company E: .80, (c) Expected Risk Free Rate of Return: 3%, (d) Debt: $10,000,000, (e) Equity: $8,000,000, and (f) Preferred Stock: $2,000,000.

Explanation / Answer

Calculate Company C’s weighted average cost of preferred stock, given the following information

Cost of Preferred Stock = $4.25/$53.20 = 0.07988 or 7.98%

Weighted Average Cost of Preferred Stock = 7.98% x 0.18868 =1.51%

Calculate Company D’s weighted average cost of capital, given the following information: (a) Tax Rate: 22.5%, (b) Average Price of Outstanding Bonds: $982.20, (c) Coupon Rate (Debt): 5.3%, (d) NPER (Debt): 7, (e) Dividend: $2.30, (f) Growth Rate: 6.3%, (g) Price: $32.50, (h) Dividend on Preferred Stock: $3.25, (i) Price of Preferred Stock: $42.30, (j) Debt: $25,000,000, (k) Equity: $30,000,000, and (l) Preferred Stock: $10,000,000

WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-T)]

E = Market value of the company's equity
D = Market value of the company's debt
V = Total Market Value of the company (E + D)
Re = Cost of Equity
Rd = Cost of Debt
T= Tax Rate

Rd = 1,325,000(1-0.225)/25,000,000 = 4.11%

Re = 2.3/$32.50+.063 = 13.38%

WACC = (30,000,000/(30,000,000,+25,000,000)*13.38%)+(25,000,000)/(55,000,000)*4.11%)*(1-.225) = 8.75%

Calculate Company E’s weighted average cost of equity, given the following information

Cost of equity = 0.03+0.80(.12-.03) = 10.20%

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