H and S Industries has 500,000 shares of common stock outstanding at a market pr

Question

H and S Industries has 500,000 shares of common stock outstanding at a market price of $28 a share. Next year's annual dividend is expected to be $1.55 a share. The dividend growth rate is 2 percent. The firm also has 15,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7 percent coupon, pay interest semiannually, and mature in 7.5 years. The bonds are selling at 98 percent of face value. The company's tax rate is 34 percent. What is the firm's weighted average cost of capital?
Answer

5.4 percent

6.2 percent

7.5 percent

8.5 percent

9.6 percent

Explanation / Answer

market value of equity=500000*28=14000000 cost of equity=(current dividend/price)+growth (1.55/28)+0.02=7.54% cost of debt=3.5% because interst paid semi annually market value of debt=(1000*98%)*15000=14700000 total=14000000+14700000=28700000 equity %=48.78% debt=51.22% weighted average cost of capital=48.78%*7.54%+51.22%*3.5% 0.036+0.018=0.054 5.4%

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