Question

Garfield company needs fund worth $1,5 billion to expand its company by issuing:
1) Bonds worth $600 million that have nominal value $1000 per share in 5 years period with the interest rate 12%. The price of bonds is $980 per share and assume that tax is 30%
2) preferred stock worth $150 million whose price is $12500 per share with a constant dividend $1350 per share.
3) common stock that has market value $11250 per share and dividend and dividend paid was estimated $1050 per share with the 6% growth rate. Flotation cost is 5%
Required:
a. Calculate the cost of debt, cost of preferred stock, and cost of equity
b. Calculate the WACC

Answer 1

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ans a	Computation of cost of debt
	we have to use financial calculator to solve cost of debt
	Put in calculator
	PV		-980
	FV		1000
	PMT		120
	N		5
	compute I		12.56%
	therefore post tax cost of debt = 12.56%*(1-30%)					8.79%
	computation of cost of preferred stock
	Cost of preferred stock = Annual dividend/Preferred stock price
			=(1250/12500)
			10.00%
	Cost of equity :
	Cost of quity = Expected dividened/((current price *(1-flotation cost)) + growth rate
			=(1050/(11250*(1-5%))+6%
			15.82%
ans b	WACC = Weight of equity * cost of equity + weight of debt * post tax cost of debt + weight of preferred stock * cost of preferred stock
	Source	Market value			weight	cost of capital	weight * cost
	debt	600			40%	8.79%	3.52%
	preferred stock	150			10%	10.00%	1.00%
	equity	750	=(1500-600-150)		50%	15.82%	7.91%
		1500					12.43%
	therefore WACC =	12.43%