Company X has the following. market value, capital structure: The debt represent

Question

Company X has the following. market value, capital structure: The debt represents 40,000 bonds. Each bond it a 20-year bond. with an annual coupon of 5%. paid annually. There are 130.000 share, of preferred slock, each paying an annual dividend of $5. This dividend is expected to remain unchanged (i.e. the growth rate is zero) There are one million shares of common stock. Next year's expected dividend is $3 pet share, and the dividend is expected to grow every year by 5%. The corporate tax rate is 35%. What is the company's pre-tax cost of debt capital? What is the company's cost of preferred capital? What is the company's cost of equity (common stock) capital? What is the company's weighted average cost of capital?

Explanation / Answer

cost of debt 5% after tax cost of debt 5%*(1-tax rate) 0.0325 3.25 percent cost of preferred stock preference dividend/market price 0.13 13 percent annual dividend 5 per share price 38.46154 cost of equity shares expected dividend/market price) + growth rate 0.2 20 percent expected dividend 3 growth rate 5% market price per share 20 Capital structure source weight cost of source weight * cost debt 25 0.5 3.25 1.625 preferred stock 5 0.1 13 1.3 common stock 20 0.4 20 8 50 weighted average cost of capital 10.925 percent

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

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