1 2 Q5 Stark Industries has the following capital structure: 3 4 5 6 7 8 on Source Book Value Quantity Common Stock $1,750,000,000 151,000,000 Preferred Stock $ 247,000,000 3,500,000 Debt $3,859,000,000 3,473,100 9 10 11 12 13 14 Debt is represented by bonds issued 10 years ago with an original maturity of 15 years, a coupon rate of 2.9%, a par value of $1,000, and a quoted price of 87.94. The bonds pay interest semiannually. The preferred stock pays a $8.50 dividend annually and is currently priced at $85.00 per share. The common stock is priced at $48.78 and just paid a dividend of $2.00. The dividend is expected to grow at 3% per year from here on out. Stark Industries has a marginal tax rate of 20%. Calculate the book-value weights for each source of capital. Weight + Source Common Stock Preferred Stock Debt 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Calculate the market value weights for each source of capital. Weight Source Common Stock Preferred Stock Debt Calculate the after-tax costs of capital for each source of capital. Calculate the book-value weights for each source of capital. Source Weight Common Stock Preferred Stock 2 Debt 3 4 Calculate the market value weights for each source of capital. 25 26 Source Weight 27 Common Stock 28 Preferred Stock 29 Debt 30 31 Calculate the after-tax costs of capital for each source of capital. 32 33 Source Cost 34 Common Stock 35 Preferred Stock 36 Debt 37 Calculate the weighted average cost of capital using both the book value and market value weights. 39 40 Method WACC 41 Book Value 42 Market Value 43