Diamond Golf is a retail company selling high-end golf clubs. It has 5,000 semia
ID: 2795283 • Letter: D
Question
Diamond Golf is a retail company selling high-end golf clubs. It has 5,000 semiannual bonds outstanding with a coupon rate of 5.5%, a maturity of 20 years, and a par value of $500. The current price of the bonds if $475.00 per bond. Diamond sells the bonds through and investment banker who receives a fee of $4.00 per bond. Diamond has 100,000 shares of common stock outstanding and recently paid shareholders a dividend of $2.00 per share. The company anticipates increasing the dividend by 1% each year. There are no flotation costs for the issuance of common stock. The stock currently trades at $25.00 per share. Diamond's tax rate is 40 percent. What is Diamond Golf's adjusted weighted average cost of capital?
Explanation / Answer
Weighted Average Cost of capital is :- cost which bear by a company on all the funds which are invested in the company to gain profit.
Formula For Calculation of weighted Average Cost Of Capital
= Weighted of Debt * Cost of debt + Weighted of equity * Cost of Equity = 0.487*3.78% +0.513*9.08%
= 6.50%
Working notes :-Cost of Debt =( Interest Rate+ Floating Rate ) *(1-Tax)
= (5.5% +($4/$500)*100)(1-.4) = 6.3%(.6) =3.78%
Calculation of Weighted average capital of debt = Value of debt/ Value of total Firm = $23,75,000/$48,75,000 =0.487
Value of debt = No. of bond * Market Value of Bond# = 5000*475 =$ 23,75,000
Value Of total Firm = Value of debt + Value of equity = $23,75,000+$25,00,000 = $48,75,000
value of equity = No. of Share * Market Value Of share# = 100000*25 = $25,00,000
# Instead of using Market Value we Can use Book Value Also but answer will Be Effected
Calculation Of cost Of equity ke =
po = D1(1+g)/ke-g = 2(1+.01)/ke-.01 =$25
=>$25 = 2.02/ke-.01 = > 2.02/25 = ke-.01 => .0808 = ke-.01
=> .0808+.01 => .0908 => 9.08%
Weighted of Equity = $25,00,000/$48,75,000 = 0.513
Sorry for the wrong answer earlier but now the answer is correct
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