Question

Aaron's Rentals has 58,000 shares of common stock outstanding at a market price of $36 a share. The common stock just paid a $1.64 annual dividend and has a dividend growth rate of 2.8 percent. There are 12,000 shares of 6 percent preferred stock outstanding at a market price of $51 a share. The preferred stock has a par value of $100. The outstanding bonds mature in 17 years, have a total face value of $750,000, a face value per bond of $1,000, and a market price of $1,011 each. The bonds pay 8 percent interest, semiannually. The tax rate is 34 percent. What is the firm's weighted average cost of capital?

Answer 1

1-	cost of common stock	(expected dividend/market price)+growth rate	(1.685/36)+2.80%	7.48%
	expected dividend	1.64*1.028	1.68592
	market price		36
			2.80%
2-	cost of preferred stock = preferred dividend/market price	6/51	11.76%
3-	before tax cost of bond (semiannual) = Using rate function in MS excel	rate(nper,pmt,pv,fv,type) nper = 17*2 =34 pmt = 1000*4% = -40 pv = 1011 fv =-1000 type =0	RATE(34,-40,1011,-1000,0)	3.94%
	annual rate	3.94*2	7.88
	after tax cost of bond	7.88*(1-.34)	5.20
4-	WAC
	source	market value = Units outstanding*market price	market value	weight = individual value/total value	cost	weight*cost
	common stock	58000*36	2088000	0.603773585	7.48	4.516226
	preferred stock	12000*51	612000	0.17696812	11.76	2.081145
	bonds	(750000/1000)*1011	758250	0.219258295	5.2	1.140143
	total		3458250	WACC in % = sum of weight*cost		7.74