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) %

Explanation / Answer

Kd = Bond YTM x (1 - tax rate) = 9% x (1 - 0.35) = 9% x 0.65 = 5.85%

Kp = Preferred dividend / [Price of preferred stock - Floatation cost] = $12 / $(106 - 4.5) = $12 / 101.5

= 0.1182, or 11.82%

Ke = (Expected common dividend / Common stock price) + Growth rate = ($5 / $60) + 0.06

= 0.0833 + 0.06 = 0.1433, or 14.33%

Ka = (Kd x % of debt) + (Kp x % of preferred stock) + (Ke x % of common stock)

= (5.85% x 35%) + (11.82% x 20%) + (14.33% x 45%)

= 2.05% + 2.36% + 6.45%

= 10.86%

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