Ajax Warehouse Ltd. has asked you to calculate their weighted average cost of ca

Question

Ajax Warehouse Ltd. has asked you to calculate their weighted average cost of capital (WACC) based on the following data:
Common shares: There are 550,000 shares currently outstanding with a market price of $12.50 per share. A dividend of $1.50 per share was paid last year, and dividends are expected to grow at a rate of 2.0% for the foreseeable future.
Preferred shares: Ajax has $1,500,000 in 4.5% preferred shares outstanding. It is expected that any new preferred shares would be priced to yield a return of 3.75%
Bonds: There is currently $8,000,000 in 3.50% bonds outstanding, maturing in 8 years. Interest is paid
semi-­-annually. Similar bonds are trading to yield 2.75%.
Ajax has an effective corporate tax rate of 25%; and a target capital structure of 55% common equity, 10% preferred and the balance in debt. Based on this information what is the WACC for Ajax?
(Note: use four (4) decimal places for all calculations)

a. .0722
b. .0783
c. .0880
d. .0893

Explanation / Answer

For shares: We have D0=1.50, P0=12.50, g=2% SO Po=D1/(Ks-g) or Ks = D1/P0 + g = D0*(1+g)/P0 + g = 1.50*(1+2%)/12.50 + 2% = 14.24% For Pref Shares, we have Kp=3.75% For Bonds, we have Kd=2.75% We know WACC = Kd*(1-T)*Wd + Ks*Ws + Kp*Wp where Ws&Wd & Wp are weights of Equity & Debt & Pref shares, Kd & Ks & Kp are Before Tax cost of Debt & Cost of equity & Cost of Pref shares. SO We have WACC = 2.75%*(1-25%)*35% + 14.24%*55% + 3.75%*10% = 8.93% ..Ans (d)

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.