Directions: Solve the company's weighted average cost of capitalshowing your calculation of each part in addition to the overall WACC.

Question: During the past few years, company XYZ has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department. It is your task is to estimate Super's weighted average cost of capital (WACC). You are provided the following information:

• The firms' tax rate is 40%.

• The current market price of Super's outstanding bonds is $1,153.72. The bonds have an annual coupon rate of 12% and make coupon payments semiannually. The bonds mature in 15 years and have a par value of $1,000. New bonds will have a flotation cost of $15 per bond.

• The current price of the firm's preferred stock is $113.10 per share. The stock has a $100 par value and a 10% annual dividend rate (paid annually). Flotation costs on new preferred stock are expected to be $2.00 per share.

• The current price of the firm's common stock is $50 per share. Its last dividend was D₀= $4.19 per share. Dividends are paid semiannually and are expected to grow at an annual rate of 5% into the foreseeable future. The flotation cost for newly-issued common stock is 8%.

• Super's target capital structure is 45% long-term debt, 20% preferred stock, and 35% common equity.

2020 Balance Sheet (thousands)

cash 102

accounts payable 325

accounts receivable 400

notes payable 300

inventory 438

accruals 110

current assets 940

current liabilities 735

gross fixed assets 2391

long-term debt (bonds) 526

accum. depreciation 550

preferred stock 125

net fixed assets 1841

common stock 128

total assets 2781

paid-in capital 584

retained earnings 683

total common equity 1395

total liabilities and equity 2781