Question
Calculate the weighted average cost of capital for a firm with the following information: Marginal corporate tax rate: 25% Bonds with $1,000 face value with
Calculate the weighted average cost of capital for a firm with the following information:
Marginal corporate tax rate: 25%
Bonds with $1,000 face value with a 6% coupon rate
with semi-annual payments matures in 10 years now sells for $928.94
Preferred stock dividend $5.50
Preferred stock price $55.00
Current common stock dividend per share $1.50
Price per share of common stock $12.00
Floatation cost to sell new common stock 10%
Forecast rate of growth for corporation 4%
Risk free interest rate 4%
Market rate of return 12%
Beta for firm 1.4
Long-term debt $30,000
Preferred stock 10,000
Retained Earnings 30,000
Common Stock 40,000
$100,000
1 What is the cost of new funds raised by issuing debt?
2 What is the cost of new funds from new preferred stock?
3 What is the cost of retained earnings? (no floatation costs)
1.) Using dividend growth model
2.) Using CAPM model
- What is the cost of funds from issuing new shares of common stock
(has floatation costs) with the dividend growth model?
- What is the weighted average cost of capital using the dividend growth model?
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