The Imaginary Products Co. currently has debt with a market value of $300 millio

Question

The Imaginary Products Co. currently has debt with a market value of $300 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) which have a maturity of 15 years and are currently priced at $839.36 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $21. The preferred shares pay an annual dividend of $1.20. Imaginary also has 14 million shares of common stock outstanding with a price of $20.00 per share. The firm is expected to pay a $2.20 common dividend one year from today, and that dividend is expected to increase by 8 percent per year forever. If Imaginary is subject to a 40 percent marginal tax rate, then what is the firm’s weighted average cost of capital?

the Weights for debt:48.23% common equity:6.75% and preferred equity:45.02%

cost of common equity: 19%
Cost of debt   = 11.24%
cost of preferred equity: 5.71%

What is the firm’s weighted average cost of capital? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%
WACC   =

Explanation / Answer

WACC=weight of common equity*Cost of common equity+weight of debt*(1-tax rate)cost of debt+weight of preferred equity*cost of prefferred equity

=0.0675*0.19+0.4823*(1-0.4)*0.1124+.4502*0.0571

=0.0128+0.0325+0.0257

=0.07

WACC=7%

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