Cita Company’s target capital structure is 40 percent debt, 50 percent common stock, and 10...

Cita Company’s target capital structure is 40 percent debt, 50 percent common stock, and 10 percent preferred stock. Information regarding the company’s cost of capital can be summarized as follows:

Company sold a non-callable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semiannually, sells at a price of $1,025, and has a par value of $1,000.
The company’s preferred stock currently sells for $81.88 per share, and it pays an $8.10 annual dividend.
The company is expected to pay $1.45 dividend per share at the end of this year. Financial analysts believe that the company is expected to grow at a constant rea of 6.50 percent in future years.

The stock of the company is currently selling for $21.50

The company’s tax rate is 40
What is the Cita Company’s weighed average cost of capital (WACC)?

Solutions

Expert Solution

Cost of debt: Period to maturity = 20*2 = 40, periodic coupon = 9.25%/2*1000 = 46.25. PV = 1,025. We need to compute this bond's YTM and this can be done using the "rate" function in excel.

Thus YTM = rate(40, 46.25, -1025, 1000). This gives a value of 4.489%. This will be multiplied with 2 since the computatuion has been done for the 6 monthly period. Hence YTM = 4.489%*2 = 8.9787%. Thus after tax cost of debt = (1-40%)*8.9787% = 5.3872%

Cost of preference shares = annual dividend/current price = 8.10/81.88 = 9.8925%

Cost of equity: Here D1 = 1.45. Note that this dividend is expected to be paid at the end of the year and hence it will be D1 and not D0 as it is not the curent dividend. Now we know that P0 = D1/(r-g)

or 21.50 = 1.45/(r-6.5%)

or r-6.5% = 6.7442%

or r = 13.2442%

Thus WACC = (40% * 5.3872) + (10% * 9.8925) + (50% * 13.2442)

= 9.77%

Thus WACC = 9.77% (rounded to 2 decimal place)

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

1. The target capital structure for a firm is 40% common stock, 10% preferred stock and...

1. The target capital structure for a firm is 40% common stock, 10% preferred stock and 50% debt. If the cost of common equity is 18%, the cost of preferred stock is 10%, the before-tax cost of debt is 8%, and the firm’s tax rate is 35%. What is its weighted average cost of capital? Indicate the detailed steps on how to use a FINANCIAL CALCULATOR to solve the problems.

AA corporation has a capital structure consisting of 40% debt, 10% preferred stock, and 50% common...

AA corporation has a capital structure consisting of 40% debt, 10% preferred stock, and 50% common equity. Assume the firm has a sufficient retained earnings to fund the equity portion of its capital budget. It has 20-year, 14% semiannual coupon bonds that sell at their par value of $1,000. The firm could sell, at par, $50 preferred stock that pays a 8% annual dividend. AA’s beta is 1.4, the risk-free rate if 5%, and the market risk premium is 8%....

The firm’s target capital structure is 60% common stock, 30% debt, and 10% preferred stock. Debt:...

The firm’s target capital structure is 60% common stock, 30% debt, and 10% preferred stock. Debt: 7,000 5.0% coupon bonds outstanding, with 11 years to maturity, $1,000 par value and a quoted price of 106.25% of par value. These bonds pay interest semiannually. Common Stock: 300,000 shares of common stock selling for $65.40 per share. The stock has a beta of 1.44. Preferred Stock: 8,500 shares of preferred stock selling at $96.00 per share and pay annual dividends of $5.70....

Mullineaux Corporation has a target capital structure of 75 percent common stock and 25 percent debt....

Mullineaux Corporation has a target capital structure of 75 percent common stock and 25 percent debt. Its cost of equity is 11.5 percent, and the cost of debt is 6.2 percent. The relevant tax rate is 25 percent. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

McKinsey and Sons has a target capital structure that calls for 50% debt, 10% preferred stock,...

McKinsey and Sons has a target capital structure that calls for 50% debt, 10% preferred stock, and 40% common equity. The firm can issue new 10 year debt with an annual coupon of 9% for $968.606. The firm is in a 35% tax bracket. The firm's preferred stock sells for $80 per share and pays a dividend of $10 per share; however, the firm will only net $77 per share on the sale of new preferred stock. The firm's common...

Kahn Inc. has a target capital structure of 50% common equity and 50% debt to fund...

Kahn Inc. has a target capital structure of 50% common equity and 50% debt to fund its $12 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 14%, a before-tax cost of debt of 12%, and a tax rate of 25%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $3, and the current stock price is $33. What is the company's expected growth...

Kahn Inc. has a target capital structure of 50% common equity and 50% debt to fund...

Kahn Inc. has a target capital structure of 50% common equity and 50% debt to fund its $8 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 15%, a before-tax cost of debt of 11%, and a tax rate of 25%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $3, and the current stock price is $32. a) What is the company's expected...

The firm's target capital structure is the mix of debt, preferred stock, and common equity the...

The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings is used in the firm's WACC calculation. However, if...

The firm's target capital structure is the mix of debt, preferred stock, and common equity the...

Resources Corporation is estimating its WACC. Its target capital structure is 40% debt, 10% preferred stock,...

Resources Corporation is estimating its WACC. Its target capital structure is 40% debt, 10% preferred stock, and 50% common equity. Its bonds have an 8% coupon rate, paid semi-annually, a current maturity of 12 years, and sell for $1,080.29. The firm could sell, at par, $100 preferred stock which pays a 6.75% annual dividend (assume no flotation costs). Resources’ beta is 1.6, the risk-free rate [rRF] is 3%, and the market risk premium [RPM] is 5%. Resources is a constant-growth...

Subjects