Question

Bank Debt information:

• r _d: Interest rate on bank loans 10 %
• T: Annual Tax rate 40 %

Preferred stock information:

• D _ps: Annual Dividends on preferred stock $ 6
• P: Issuing price of ZARA’s Corporation preferred Stock $ 100
• FC: Flotation cost on issue of preferred stock / per share $ 4

Common Stock information

• r _RF: Market risk Free Rate 5%
• RP: Expected Market Risk Premium 5%
• b_i: ZARA stocks beta coefficient (index of the stocks risk) 2

ZARA Corporation plans to invest money in a new project; the finance for the project will be allocated according to the following capital structure:

W d:   Debt	30%
W ps: Preferred Stock	50%
Ws:   Common Stock	20%

Instructions:

1. Calculate the cost of debt.                                                                                                  
2. Calculate the cost of preferred stock.                                                                                
3. Calculate the cost of common stock.                                                                                  

Calculate the weighted average cost of capital (WACC).                                     

Answer 1

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