Question

Given the following information, calculate the weighted average cost of capital for Puppet Corporation. (Round intermediate calculations to 2 decimal places. Round the final answers to 2 decimal places.)

Percent of capital structure:
Debt	45%
Preferred stock	30
Common equity	25
Additional information:
Bond coupon rate	8.5%
Bond yield	7.75%
Bond flotation cost	2%
Dividend, expected common	$1.50
Price, common	$30.00
Dividend, preferred	6%
Flotation cost, preferred	3%
Flotation cost, common	4.00%
Corporate growth rate	6%
Corporate tax rate	35%

a. Calculate the cost of capital assuming use of internally generated funds.

Internal capital cost             %

b. Calculate the cost of capital assuming use of externally generated funds.

External capital cost             %

Answer 1

a. Calculation of the cost of capital assuming use of internally generated funds
Cost of Debt
YTM	7.75%
Afer Tax cpst of Debt	7.75% (1-35%)	5.04%
Cost of Debt adjusted for flotation	5.04%(1-2%)	4.94%
Cost of Preferred Stock
Yield	6%
Adjusted for flatation	6%(1-3%)	5.82%
Cost Of common Stock
Yield	(1.5/30)+6%	11.00%
Debt	45	4.94%
Preferred Stock	30	5.82%
Common Stock	25	11.00%
WACC	6.72%
b.cost of capital assuming use of externally generated funds
YTM	7.75%
Afer Tax cpst of Debt	7.75% (1-35%)	5.04%
Cost of Debt adjusted for flotation	5.04%(1-2%)	4.94%
Cost of Preferred Stock
Yield	6%
Adjusted for flatation	6%(1-3%)	5.82%
Cost Of common Stock(External earning)
Cost of retained earnings/(1-flotation cost)	11%/(1-4%)	11.46%
Debt	45	4.94%
Preferred Stock	30	5.82%
Common Stock	25	11.46%
WACC	6.83%