Compute the weighted average cost of capital for a firm of your choosing (they m
ID: 2653632 • Letter: C
Question
Compute the weighted average cost of capital for a firm of your choosing (they must have bonds and common stock outstanding, preferred stock is optional). You should use current market information to determine the firm’s current cost of equity, cost of preferred stock, and cost of debt, and their respective weights. Your report should include all information that you gather and the source where you gathered the information. Excel sheets/tables are fine to illustrate the information, but should be accompanied with written work summarizing your findings either via text boxes in the excel document or an additional word document.
Explanation / Answer
Answer:
Bonds carry 8% interest. Issued at par, Reedemable at par maturity period 20 years. Flotation cost 4%. Preference Shares carry 10% dividend rate issue and redemtion at par. Maturity period 15 years. Flotation cost 5%. Equity dividend expected at the end of the year, i.e. Rs. 20 per share. Anticipated growth rate in dividends is 5%. Corporate tax 55%.
Solution:
Kd = [i(1-t)+(RP-NP)/n] / [(NP+RP)/2]
= [80(1-0.55)+(1000-960)/20] / [(1000+960)/2]
=3.88%
Kp = [D+(RP-NP)/n]/[(NP+RP)/2]
= [1+(10-9.5)/15] / [(9.5+10)/2]
Ke = (20/200) + 0.05 = 15%
Statement showing computation of weighted average cost of capital (Book Value weights) Capital Structure Amount Weights C.O.C WACC Bonds 1600000 0.4 3.88% 1.55% Preference Shares 400000 0.1 10.59% 1.06% Equity Share Capital 2000000 0.5 15% 7.50% 4000000 1 Ko= 10.111% Statement showing computation of weighted average cost of capital (Market Value weights) Capital Structure Amount Weights C.O.C WACC Bonds 1760000 0.282 3.88% 1.09% Preference Shares 480000 0.077 10.59% 0.82% Equity Share Capital 4000000 0.641 15% 9.62% 6240000 1 Ko= 11.524%Related Questions
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