ect 23) Weighted average cost of capital (20 points) A fim\'s CEO has t the comp

Question

ect 23) Weighted average cost of capital (20 points) A fim's CEO has t the company's target capital structure: 30% long-term debt 10% preferred stock, and 60% common stock equity. The firm's ving sourcesofporat, tax rate is 40 percent. To finance its planned capital expenditures, the firm is can sell a 15-year, $1,000 par value bond paying looking at the following sources of capital 7% annual coupon for $960. To issue the bond, the Debt: The firm firm will have to pay 2% of the par value in bond flotation costs. Preferred Stock: The firm dividend of $10 per share. The can sell preferred stock at a par value of $100 per share. The stock will carry an annual . cost of issuing and selling the stock is $3 per share. stock is currently selling for $15 per share. This year, the firm paid S1.75 in s dividends have been growing at a constant rate of 4% per year for the last four years .Common Stock: A firm's common dividends per share. The firm' and are expected to sustain this growth rate thereafter .New common stock issue: If the firm decides to issue new common stock, its underwriter indicated that the issue will have to pay S1 per share in have to be underpriced by $I below the current share price. Further, the firm will loatation costs a) Find the firm's after-tax cost of debt financing (3 points) N 14S TG

Explanation / Answer

Part - A

Cost of Debt

Kd = Interest (1-Tax Rate)+ (RV -SV)/n

. ____________________________

RV+SV/2

=70(1-Tax Rate)+1000-940.80(960*98%)/15

___________________________________

1000+940.80/2

=42+3.95/970.40

Kd =4.74%

Part - B

Kp = Preferred Stcok Dividend /Price of Stock - Floatation cost

=10/(100-3)

=10/97

=10.31%

Part - C

Retained Earnings

Ks = (D0(1+g)/PO)+growth

=1.75(1.04)/15+0.04

=16.13%

Part - d

New Common Stock

Ke = 1.75(1.04)/15-1+0.04

=0.17 or 17%

Part - E

Computation of WACC

Part - F

New WACC

Particulars Proportion % WACC Debt 0.30 4.74% 1.42% Preferred Stock 0.10 10.31% 1.03% Retained Earnings 0.60 16.13% 9.68% WACC 12.13%

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