Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

QUESTION 1 : MidStrata Company is trying to calculate its cost of capital for use in a capital budgeting decision.Mr . John, the vice -

QUESTION 1 : MidStrata Company is trying to calculate its cost of capital for use in a capital budgeting decision.Mr. John, the vice-president of finance, has given you the following information and has asked you tocompute the weighted average cost of capital.The company currently has outstanding a bond with a 6.5 percent coupon rate and a convertible bondwith a 4.5 percent rate. The firm has been informed by its investment dealer that bonds of equal riskand credit rating are now selling to yield 7.5 percent. The common stock has a price of $74 and anexpected dividend (D1) of $2.20 per share. The firms historical growth rate of earnings and dividendsper share has been 9.2 percent, but security analysts on Bay Street expect this growth to slow to 7percent in the future years. The preferred stock is selling at $70 per share and carries a dividend of $8.50per share. The corporate tax rate is 30 percent. The flotation cost is 3.3 percent of the selling price forpreferred stock.The optimum capital structure for the firm seems to be 40 percent debt, 10 percent preferred stock, and50 percent common equity in the form of retained earnings.a) Compute the cost of capital for the individual components in the capital structure.b) Calculate the weighted average cost of capital. Q#2: Given the following information for Magrath Power Co., find the WACC. Assume the company'stax rate is 35 percent.Debt: 10,000 with 6.4%coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108percent of par; the bonds make semiannual payments.Common stock: 495,000 shares outstanding, selling for $63 per share; the beta is 1.15.Preferred stock: 35,000 shares of 3.5% preferred stock outstanding, currently selling for $72 per share.Market: 7% market risk premium and 3.2 percent risk-free rate.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Intelligence For IT Professionals

Authors: Karen Berman, Joe Knight, John Case

1st Edition

1422119149, 9781422119143

More Books

Students also viewed these Finance questions