Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision, Mi Jeter, the vice-president of

image text in transcribed
image text in transcribed
A Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision, Mi Jeter, the vice-president of finance has given you the following information and has asked you to compute the weighted average cost of capital The company currently has outstanding a bond with a 10,5 percent coupon rate and another bond with an 81 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.4 percent . The common stock has a price of $59 and an expected dividend (D) of $179 per share. The historical growth pattem (a for dividends is as follows: $ 1.34 1.48 1.63 1.79 The preferred stock is selling at $79 per share and pays a dividend of $750 per shore. The corporate tax rate is 30 percent. The flotation cost is 20 percent of the selling price for preferred stock. The optimum capital structure for the firm is 20 percent debt, 10 percent preferred stock and 70 percent common equity in the form of retained eamings. a. Compute the average historical growth rate. (Do not round intermediate calculations. Round your answer to the nearest whole percent and use this value as g. Input your answer as a whole percent.) Growth rato b. Compute the cost of capital for the individual components in the capital structure. (Use the rounded whole percent computed in part a for 9. Do not round any other intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Dobt Preferred stock Common equity c. Calculate the weighted cost of each source of capital and the weighted average cost of capital. (Do not round Intermediate calculations. Input your answers os o percent rounded to 2 decimal places.) Weighted Cost Debt Proforrod stock Common equity Weighted average cost of capital 0.00%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Essentials Of Cost Accounting For Health Care Organizations

Authors: Steven A. Finkler

1st Edition

0834205289, 978-0834205284

More Books

Students also viewed these Accounting questions