Question
In: Finance
Given the following information: Percent of capital structure: Preferred stock 20 % Common equity (retained earnings)...
Given the following information:
Percent of capital structure:
| Preferred stock | 20 | % |
| Common equity (retained earnings) | 50 | |
| Debt | 30 | |
Additional information:
| Corporate tax rate | 40 | % | |
| Dividend, preferred | $ | 7.00 | |
| Dividend, expected common | $ | 3.50 | |
| Price, preferred | $ | 98.00 | |
| Growth rate | 8 | % | |
| Bond yield | 10 | % | |
| Flotation cost, preferred | $ | 3.40 | |
| Price, common | $ | 86.00 | |
Calculate the weighted average cost of capital for Digital
Processing Inc. (Do not round intermediate calculations.
Input your answers as a percent rounded to 2 decimal places.)
|
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Solutions
Expert Solution
Weighted cost of each source of capital
|
Weighted Cost |
|
|
Debt |
1.80% |
|
Preferred Stock |
1.48% |
|
Common Equity |
6.04% |
|
Weighted average cost of capital |
9.32% |
Cost of Debt
Cost of Debt = Bonds Yield x (1 – Tax Rate)
= 10% x (1 – 0.40)
= 10% x 0.60
= 6.00%
Weighted Cost = 1.80% [6.00% x 0.30]
Cost of Preferred Stock
Cost of Preferred Stock = Preferred Dividend / [Price of Preferred stock – Flotation cost]
= [$7.00 / ($98 - $3.40)]
= [$7.00 / $94.60]
= 0.0740
= 7.40%
Weighted Cost = 1.48% [7.40% x 0.20]
Cost of Common Stock
Cost of Common Stock = [D1 / P0] + g
= [$3.50 / $86.00] + 0.08
= 0.0407 + $0.08
= 0.1207
= 12.07%
Weighted Cost = 6.04% [12.07% x 0.50]
Weighted Average Cost of Capital
= Weighed Cost of Debt + Weighted Cost of Preferred stock + Weighted cost of Common Stock
= 1.80% + 1.48% + 6.04%
= 9.32%
“Hence, the weighted average cost of capital for Digital Processing Inc would be 9.32%”
jeff jeffy answered 1 year agoRelated Solutions
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