Given the following information, calculate the weighted average cost for the Ban

Question

Given the following information, calculate the weighted average cost for the Ban Corp.  
Percent of capital structure:
Preferred stock                                                      10%
Common equity                                                     70%
Debt                                                                      20%

Additional information:
Corporate tax rate                                                  34%
Dividend, preferred                                                $8.00
Dividend, expected common                                  $4.00
Price, preferred                                                      $80.00
Growth rate                                                            5%
Bond yield                                                             7%
Price, common                                                         $80.00

Explanation / Answer

Answer :

Preferred Stock ..................................................10%

Common Stock...................................................70%

Debt...................................................................20%

1. Kd = Yield (1-T)

     = 7% (1-.34)

      = 7% (.66) = 4.62

2.

      Kp = Dp / (Pp - F)

           = $ 8 / ($ 80 - 0) = $ 8 / $ 80 = 10%

3.

      Ke = (D1 /P0)+g

           = ( $ 4 / $ 80.00) + 5%

           = 5 % + 5% = 10%

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