The following table shows the capital of Valley Utility Company: The coupon inte
ID: 2790613 • Letter: T
Question
The following table shows the capital of Valley Utility Company:
The coupon interest rate for the debt is 10%, the tax rate for this company is 40%. When the preferred stocks were issued the price was $55. The company paid 10 percent flotation to the investment company. The company pays a constant $6 annual dividend to preferred stockholders. The company has a beta of 2, the risk free rate is 9 percent, the market interest rate is 11 percent. What is the WACC of this company?
Type of Capital Amount Long Term Debt $25,000,000 Preferred Stock $1,000,000 Common Stock $24,000,000Explanation / Answer
WACC 9.48% Dear Student Thank you for using Chegg Please find below the answer and please give thumbs up Statementshowing Computations Paticulars Amount Weight Cost of Capital WACC Long term debt 25,000,000.00 0.50 6% 3.00% Preferred stock 1,000,000.00 0.02 12.12% 0.24% Common Stock 24,000,000.00 0.48 13% 6.24% 50,000,000.00 WACC 9.48% Kd = 10%(1-.40) = 6% Kp = 6/(55-5.5)= 6/49.5 = 12.12% ke = 9% + 2(11%-9%) = 13%
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