Sigma Company has the following capital structure: 45% debt, 15% preferred stock

Question

Sigma Company has the following capital structure: 45% debt, 15% preferred stock and 40% common stock. Deterrmine the weighted average costs of capital given the follwoing information. Ignore floatation costs. Assume a tax rate of 35%.

- The firm's 10-year 7% annual coupon bond is currently trading at $717.49.

-the firms 10% annual dividend perpetual preferred stock with a par value of $100 is tading at $71.43.

- The common stock is trading at $150. Their next dividend is expected to be $5.00. the growth rate is forcasted at 10%.

Explanation / Answer

1. Current Yeild= Annual Coupon/Current market price

We assumed that the face value of the bond was $1000

So the current yield would be : 1000*7%/717.49

=9.75%

Cost of debt before tax = 9.75%

Tax rate= 35%

Cost of debt after tax= 9.75% (1-35%)

=6.34%

2. Cost of preferred stock

Dividend: 10

Price:71.43

cost of prefered stock= Dividend/Price

=10/71.43

=14%

Cost of equity: (Expected dividend/Current price)+ growth

= (5/150)+10%

=13.33%

Particular Weight cost weighted cost (weight*Cost) Debt 45% 6.34% 2.85% Prefered stock 15% 14% 2.10% Equity stock 40% 13.33% 5.33% Total wacc 10.29%

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