Question
ABC Co. has the following capital structure: 500,000 shares of common stock, which were issued at a price of $25 per share (book value), and
ABC Co. has the following capital structure:
- 500,000 shares of common stock, which were issued at a price of $25 per share (book value), and currently trade on the capital markets at $40 per share. The company paid a dividend this year of $1.50, and has a beta of 1.10
- 40,000 shares of 6% preferred stock, which were issued at par of $50 (book value) and currently trade on the capital markets at $70 per share.
- 25,000 5% semi-annual bonds with a par value of $1,000 each. The bonds have 15 years to maturity and currently sell for $950.
ABCs marginal tax rate is 40%. The - the market rate of return is 10.0%, and the risk-free rate is 3.0%.
- What is the firms capital structure based on market values?
- What is ABCs (after-tax) cost of common stock?
- What is ABCs (after-tax) cost of preferred stock?
- What is ABCs (after-tax) cost of debt?
- Calculate ABCs weighted average cost of capital.
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| Market Vale | Weighting | Cost | WACC |
| Bonds
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| Preferred shares
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| Common shares
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| Total |
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| WACC = |
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Financial Management Theory and Practice
Authors: Eugene Brigham, Michael Ehrhardt, Jerome Gessaroli, Richard Nason
2nd Canadian edition
176517308, 978-0176517304
