As a newly-hired financial analyst with Traid Winds, Incorporated, you have been

Question

As a newly-hired financial analyst with Traid Winds, Incorporated, you have been asked to calculate the firm's weighted average cost of capital (WACC). a) A 14-year bond with an 8 percent semiannual coupon has a par value of $1,000. The price of the bond today is $1,075. What is the company's marginal cost of debt, r_d? b)The firm's preferred stock has a par value of $100 per share, and pays a 5.6% annual dividend. If the preferred stock's current price is $80, what is the firm's marginal cost of preferred stock, r_p? c)The company is expected to pay a year-end common stock dividend (D_1) of $2.10 per share, and the firm has projected a constant growth rate of 5%. The current stock price is $21,875 per share. The firm will need to issue new shares to finance its future projects. If flotation costs are 20 percent, what is the marginal cost of equity, r_e, for the firm? d) Assuming a target capital structure of 40% debt, 10% preferred stock, and 50% common stock, and a 35% tax rate, what is the firm's cost of capital?

Explanation / Answer

cost of debt par value 1000 interest rate 8% market price 1075 tax rate 35% cost of debt (interest/ market price)*1-tax rate 4.837209 percent cost of preference shares par value 100 dividende rate 5.60% market price 80 cost of preferred stock preferece dividend/market price 0.07 7 percent cost of equity expected dividend 2.1 market price 21.875 growth rate 5% cost of equity 0.146 14.6 if floatation cost of 20% then cost of equity share price 21.875 flotattion expense 4.375 net proceeds 17.5 cost of equity 0.17 0.17 Weighted avergae cost of capital with the old cost of equity weight cost of source debt 0.4 4.837209 1.934884 preference 0.1 7 0.7 equity 0.5 14.6 7.3 overall cost of capital 9.934884 percent Weighted avergae cost of capital with the new cost of equity with flotation cost Weighted avergae cost of capital with the old cost of equity weight cost of source debt 0.4 4.837209 1.934884 preference 0.1 7 0.7 equity 0.5 17 8.5 overall cost of capital 11.13488 percent

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