The Imbeciles Assoseation of Americka (IAA) is interested in determining their c

Question

The Imbeciles Assoseation of Americka (IAA) is interested in determining their cost of capital. Compute the after tax cost of each of the following: Assume that the corporate tax rate is 35%. An IAA 20-year bond with an 8% coupon and interest paid semi-annually. Investors paid $1,000 per bond but the underwriter received $172 per bond for flotation costs. [6.5%] IAA preferred stock paying a dividend of $4. The public paid $25 per share but flotation costs were $2 per share. [17.4%] IAA common stock is issued at a price of $65. Flotation costs were 6% of the market price and dividends will be $3.00 in one year and are expected to grow at a rate of 4% per year. [8.9%] The cost of retained earnings at IAA [8.6%] What is the weighted cost of capital for the IAA Corporation? It consists of 50% debt, 30% preferred, and 20% common. The cost of debt =12%, cost of preferred= 14%, and the cost of common=16%. [13.4%]

Explanation / Answer

2) weight of debt=50% weight of prefered stock=20% weight of common stock= 30%

cost of debt=12% (tax rate as 35%)

Cost of prefered= 14%

cost of common=16%

Weighted cost of capital=

(.5*12%*(1-40%))+(30%*14%)+(20%*16%)

=11%

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