Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

undefined Check my work 5 Problem 11-28 (calculator version) 15 points McNabb Construction Company is trying to calculate its cost of capital for use in

image text in transcribedimage text in transcribedundefined

Check my work 5 Problem 11-28 (calculator version) 15 points McNabb Construction Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Reid, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. eBook Print The company currently has an outstanding bond with a 10.6 percent coupon rate and another bond with a 8.2 percent rate. The firm has been informed by its investment dealer that bonds of equal risk and credit ratings are now selling to yield 11.5 percent. The common stock has a price of $98.84 and an expected dividend (D1) of $3.55 per share. The historical growth pattern (g) for dividends is as follows: References $2.40 2.64 2.91 3.21 The preferred stock is selling at $90 per share and pays a dividend of $8.50 per share. The corporate tax rate is 40 percent. The flotation cost is 2.6 percent of the selling price for preferred stock. The optimum capital structure for the firm is 35 percent debt, 5 percent preferred stock, and 60 percent common equity in the form of retained earnings. Check my work mode: This shows what is correct or incorrect for the work you have completed so far. It does not indicate completion. Return to question 5 The preferred stock is selling at $90 per share and pays a dividend of $8.50 per share. The corporate tax rate is 40 percent. The flotation cost is 2.6 percent of the selling price for preferred stock. The optimum capital structure for the firm is 35 percent debt, 5 percent preferred stock, and 60 percent common equity in the form of retained earnings. 15 points a. Compute the historical growth rate. (Round intermediate calculations to 2 decimal places. Round the final to 2 decimal places.) Growth rate 10.18 * % b. Compute the cost of capital for the individual components in the capital structure. (Round growth rate to 2 decimal places. Round the final answers to 2 decimal places.) Cost of capital 6.90 % Debt (ka) Preferred stock (Kp Common equity (K) 9.70 10.22 X c. Calculate the weighted cost of each source of capital and the weighted average cost of capital. (Round your intermediate calculations to 2 decimal places. Round the final answers to 2 decimal places.) Weighted Cost 2.42 Debt (d) Preferred stock (Kp) Common equity (K) 0.49 6.13 Weighted average cost of capital (Kg) 9.04

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

Public Finance And Public Policy

Authors: Jonathan Gruber

7th Edition

1319281109, 9781319281106

More Books

Students also viewed these Finance questions