Question
ABC Company is interested in measuring its weighted average cost of capital. In the previous year they reported earnings available to common stock of $6,300,000.
ABC Company is interested in measuring its weighted average cost of capital. In the previous year they reported earnings available to common stock of $6,300,000. Also, they paid a dividend of $2.15 on each of its 1,000,000 common shares outstanding. The market price of the common stock is $53 and dividends are expected to grow at a rate of 4.5% per year for the predictable future. ABC Company can issue $3.00 dividend preferred stock for a market price of $32.00 per share where the flotation costs would amount to $4.2 per share. ABC Company can also issue $1,600-par-value, 10% coupon, 5-year bonds that can be sold for $1,850 each with flotation costs amount to $55.00 per bond. Knowing that the capital structure of ABC Company includes 45% debt, 15% preferred stock, and 40% common stock; determine its weighted average cost of capital. (tax rate is 35%)
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