Question

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At the end of its 2017 fiscal year-end Hopkins Corporation had 50,000 shares of preferred stock...

At the end of its 2017 fiscal year-end Hopkins Corporation had 50,000 shares of preferred stock outstanding. The preferred stock has a book value of $30 per share. In addition, Hopkins paid $75,000 in dividends to preferred shareholders in 2017. Hopkins also has $2,500,000 of interest bearing debt outstanding and its after-tax cost of debt is 6.4%. The market value of Hopkins Corporation’s common stock equity at year end is $6,240,000 and the company's cost of common equity is 9.4%.

Required:

a.	What is the total book value of Hopkins Corporation's preferred stock at the end of 2017?
b.	Estimate the cost of Hopkins Corporation's preferred equity capital.
c.	Calculate Hopkins Corporation's weighted average cost of capital.

Expert Solution

(a) What is the total book value of Hopkins Corporation's preferred stock at the end of 2017?

= 50,000 Shares x $30 per share

= $15,00,000

(b) Estimate the cost of Hopkins Corporation's preferred equity capital.

Cost of preferred capital = Preferred Dividend / Value of preferred stock

= ($75,000 / $15,00,000) x 100

= 5%

(c) Calculate Hopkins Corporation's weighted average cost of capital.

Value Weight

Value of Preferred Stock 1,500,000.00 0.1465

Value of Debt 2,500,000.00 0.2441

Value of Equity 6,240,000.00 0.6094

Cost of Preferred Stock 5%

Cost of Debt 6.40%

Cost of Equity 9.40%

weighted average cost of capital

= (5% x 0.1465 ) + (6.40% x 0.2441 ) + (9.40% x 0.6094)

= 8.02%

= or 8% (Rounded Figure)

ekkarill92 answered 1 year ago

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