Q6
The aftertax cost of debt is 7.50 percent, and the cost of common equity (in the form of retained earnings) is 14.50 percent; a. What is the firm's weighted average cost of capital? (Do not round intermediate calculations. input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt Common equity Weighted average cost of capital An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.50 percent, and the cost of common equity (in the form of retained earnings) is 16.50 percent. b. Recalculate the flrm's weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) I Weighted Cost An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.50 percent, and the cost of common equity (in the form of retained earnings) is 16.50 percent. b. Recalculate the firm's weighted average cost of capital. (Do not round intermediate calculations. input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt % Common equity Weighted average cost of capital 0.00 % firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 13.4 percent. The common stock has a price of $58 and an expected dividend (01) of $5.30 per share. The flrm's historical growth rate of earnings and dividends per share has been 9.5 percent, but security analysts on Wall Street expect this growth to slow to 7 percent in future years. The preferred stock is selling at $54 per share and carries a dividend of $6.75 per share. The corporate tax rate is 25 percent. The flotation cost is 2.1 percent of the selling price for preferred stock. The optimum capital structure is 40 percent debt, 25 percent preferred stock, and 35 percent common equity in the form of retained earnings. a. Compute the cost of capital for the individual components in the capital structure. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt % Preferred stock Common equity b. Calculate the weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt % Preferred stock Common equity Weighted average cost of capital 0.00 % The company currently has outstanding a bond with a 6.2 percent coupon rate and another bond with a 3.2 percent coupon rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 7.2 percent. The common stock has a price of $62 and an expected dividend (Di) of $3.30 per share. The firm's historical growth rate of earnings and dividends per share has been 11.5 percent, but security analysts on Wall Street expect this growth to slow to 9 percent in future years. The preferred stock is selling at $58 per share and carries a dividend of $9.75 per share. The corporate tax rate is 30 percent. The flotation cost is 1.9 percent of the selling price for preferred stock. The optimum capital structure is 50 percent debt, 5 percent preferred stock, and 45 percent common equity in the form of retained earnings. a. Compute the cost of capital for the individual components in the capital structure. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt % Preferred stock Common equity Weighted Cost Debt % Preferred stock Common equity b. Calculate the weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt % Preferred stock Common equity Weighted average cost of capital 0.00 %Delta Corporation has the following capital structure: Cost Weighted (aftertax) Weights Cost Debt (Kd) 8.6% 10% 6.86% Preferred stock (KP) 6.8 26 1.36 Common equity (Ke) (retained earnings) 16.2 79 7.14 Weighted average cost of capital (Ka) 9.36% a. If the firm has $49 million in retained earnings, at what size capital structure will the firm run out of retained earnings? (Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").) Capital structure size (X) _'m b. The 8.6 percent cost of debt referred to earlier applies only to the first $9 million of debt. After that the cost of debt will go up. At what size capital structure will there be a change in the cost of debt? (Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").) Capital structure size (Z) I Imillion Compute K,? and Kn under the following circumstances: a. 01 = $5.00, P9 = $70, 9 = 8%, F= $7.00. (Round your intermediate and final answers to 2 decimal places.) b. D1 = $0.22, Pa = $28, 9 = 7%, F: $2.50. (Round your intermediate and final answers to 2 decimal places.) Ke % Kn %
