Falcon Ridge Developers wants to compute the firm’s WACC for capital budgeting p
ID: 2713839 • Letter: F
Question
Falcon Ridge Developers wants to compute the firm’s WACC for capital budgeting purposes. The firm uses 30% debt, 20% preferred stock and the remainder is in equity. The YTM on the firm’s debt is currently 4.5% and the firm’s marginal tax rate is 40%. They pay a dividend of $3 on their preferred stock and the current price of the preferred stock is $75. Falcon’s most recent common dividend was also $3, but has been growing at a rate of 8% per year and is expected to continue that trend. The common stock is currently selling for $50. Calculate the firm’s WACC.
Explanation / Answer
Cost of debt is 4.50% Post tax cost of debt 2.70% % of debt 30% Cost of prefered stock is divedend/price 4.00% % of preference stock 20% Asper divedend discount model PRICE = next year divedend D1/(rate of return - growth rate) 50= 3*(1.08)/(r-8%) 14.48% % of equity 50% WACC is cost of equity*% of wquity + cost of debt*% of debt + cost of preference stock*% of preference stock 8.8500%
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