Given the following information: Percent of capital structure: Debt 35% Preferre

Question

Given the following information: Percent of capital structure: Debt 35% Preferred stock 20 Common equity 45 Additional information: Bond coupon rate 11 % Bond yield to maturity 9 % Dividend, expected common $ 5.00 Dividend, preferred $ 12.00 Price, common $ 60.00 Price, preferred $ 106.00 Flotation cost, preferred $ 4.50 Growth rate 6 % Corporate tax rate 35 % Calculate the Hamilton Corp.'s weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt (Kd) % Preferred stock (Kp) Common equity (Ke) Weighted average cost of capital (Ka) % HintsReferenceseBook & Resources Hint #1

Explanation / Answer

After tax COst of Debt = Rd(1-tc)

After tax cost of debt =9%(1-35%) = 5.85%

COst of Preferred Stock = Preferred Dividend /Net Issuing Price

Floatation cost = $4.50

Cost Of Preferred Stock = $12/$106*4.50 = 2.52

COst of equity = D1/P0+g

Cost of equity = 5/60+6% =14.33 %

WACC = 35%x5.85%+2.52*20%+14.33*45% = 0.020475+0.504+5.732 = 6.26%

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