Question

Capital component weights, cost of debt, cost of preferred stock, and cost of common equity.

Be sure to use 4 decimal places.

Current assets: 3,100

Property, plant and equipment: 3,400

Total assets: 6,500.

Current liablities: 1,500

Long term debt: 1,750

Preferred stock, $100 par: 500

Common stock, no par: 1,250

Retained earnings: 1,500

Total liabilities and equities: 6,500

Growth rate 7.5%

Coupon on new bonds: 7.75%

Corporate tax rate: 25%

Dividend on preferred: 8%

Price of common stock: $24.00

Price of $100 par value preferred: $75.00

Anticipated common dividend: $1.56

Flotation cost on preferred: $4.00

Flotation cost on common: $2.50

Answer 1

Cost of Preferred stock and common stock is calculated without considering the floatation cost because no new shares are issued
cost of debt		7.75%
after tax cost of debt	7.75*(1-.25)	5.8125
cost of preferred stock	preferred dividend/market price	(100*8%)/75	10.6667%
cost of equity	(anticipated dividend/market price)+growth rate	(1.56/24)+7.5%	14.0000%
cost of retained earning	same as cost of common stock		14.0000%
source	value	weight = value/total
debt	1750	0.35
preferred stock	500	0.1
common stock	1250	0.25
retained earnings	1500	0.3
total	5000
WACC
source	weight = (value/total )*100	cost of source	weight*cost of source
debt	35%	5.81%	2.0344%
preferred stock	10%	10.6667%	1.0667%
common stock	25%	14%	3.5000%
retained earnings	30%	14%	4.2000%
total	WACC	sum of weight*cost of source	10.8010%