Question:

The Cisco Systems Corporation is the worldwide leader in networking for the Internet. The companys assets are financed with preferred and ordinary equity only.

The firm has 100,000 ordinary shares outstanding. The current price of the firms common stock is $45. Cisco has paid a $2.00 dividend per share this year. The firms dividend is expected to grow by 3% per year after that. The company has 15,000 preferred shares outstanding. The current price of the firms preferred stock is $25. Cisco pays a $1.25 dividend per share each year. The applicable corporate tax rate for the company is 40%.

In answering the questions that follow, you will need to show all workings and intermediate calculations along with the final answer.

1. Calculate the cost of ordinary shares and the cost of preferred shares for the Cisco Systems Corporation.
2. Calculate the weight of ordinary shares and the weight of preferred shares for the Cisco Systems Corporation.
3. Calculate the corporate Weighted Average Cost of Capital for the Cisco Systems Corporation.
4. Would your answer to part (a) above change, if you were given the following information about the firms common stock? The beta of the companys shares is 2.5, the risk-free rate is 4%, and the return on the market is 6%.