Question
As a management consultant for Cooper Consulting, you have been hired by Weems and Plath to compute their cost of capital. You are surprised to
As a management consultant for Cooper Consulting, you have been hired by Weems and Plath to compute their cost of capital. You are surprised to learn that they have never bothered to determine this in the past. They have been using 15% in their capital budgeting analysis but did not know if this was correct. L-term notes payable 400 L-term debt 1,000 Preferred stock 100 Retained earnings 400 Common Stock 1200 L-term liabilities + Equity 3,100 Beta of Weems and Plath is 1.25 Risk -free rate is 4% Market expected rate of return 10% Current price of one share of common stock is $20/share Dividend after one year $1.75 per share Growth rate is 3% Tax rate is 40% Cost of Debt 7.36% Cost of Preferred 8.57% Cost of Common stock? USE CAPM TO SOLVE 1. COMPUTE THE FIRMS CAPITAL STRUCTURE WEIGHTS. To do this you need to determine the $ value of debt, preferred, and equity. Use values from long-term liabilities and equity stated above. COMPUTE THE WACC
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