River Runs Ltd$.$ has the following right$-$hand side of its balance sheet:

Debt: $8\%$ coupon, $12$ years to maturity $$10,000,000$

Preferred shares: $6\%$ dividend $2,000,000$

Common shares: $1,000,000$ outstanding $1,000,000$

Retained earnings $6,000,000$

$$19,000,000$

New debt could be issued to yield $12$ percent, with flotation costs netting the firm $$965$ on each $$1,000$ bond.

Preferred shares would require a current yield of $10$ percent, with after tax flotation costs of $4$ percent.

Common

shares currently trade at $$11,$ but new shares would be discounted to to $$10\mathrm{.}50$ to encourage sales.

After tax

flotation costs on new common shares would be $5$ percent.

The anticipated dividend growth rate is $12$ percent.

The expected dividend is $$0\mathrm{.}75.$

River Runs Ltd$.$ has a $40$ percent tax rate and would require new share capital to fund new investments.

Required:

Based on market value weightings, calculate River Runs' weighted average cost of capital.

Solution:

Enter formulas and data to complete the requirements of this problem.

Cost elements:

Current debt yield $12\mathrm{.}00\%$ Common share price $$11\mathrm{.}00$

Tax rate $40\mathrm{.}00\%$

New issue common

share price $$10\mathrm{.}50$

Current preferred yield $10\mathrm{.}00\%$ Common share flotation cost $5\mathrm{.}00\%$

Preferred stated dividend $6\mathrm{.}00\%$ Growth rate $12\mathrm{.}00\%$

Preferred stated capital $2,000,000$ Expected dividend $$0\mathrm{.}75$

Preferred flotation cost $4\mathrm{.}00\%$ Number of shares outstanding $1,000,000$

Cost elements: How we get the solution below for cost elements?

Cost of Debt: $7\mathrm{.}46\%$

Cost of Preferred $10\mathrm{.}42\%$

Cost of Equity $20\mathrm{.}75\%$