Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Valvano Publishing Company is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Washburn, the vice-president of finance, has

Valvano Publishing Company is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Washburn, the vice-president of finance, has given you the following information and asked you to compute the weighted average cost of capital.

The company currently has outstanding a bond with an 7.0 percent coupon rate and a convertible bond with a 4.0 percent rate. The firm has been informed by its investment dealer, Dean, Smith, and Company that bonds of equal risk and credit rating are now selling to yield 8.0 percent. The common stock has a price of $90.0 and an expected dividend (D1) of $6.60 per share. The firms historical growth rate of earnings and dividends per share has been 9.0 percent, but security analysts on Bay Street expect this growth to slow to 13 percent in the future. The preferred stock is selling at $86 per share and carries a dividend of $9.20 per share. The corporate tax rate is 40 percent. The flotation costs are 3 percent of the selling price for preferred stock.

The optimum capital structure for the firm seems to be 45 percent debt, 20 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. (Round the final answers to 2 decimal places.)

Cost of capital
Debt (Kd) %
Preferred stock (Kp)
Common equity (Ke)

b.

Calculate the weighted average cost of capital. (Round intermediate calculations to 2 decimal places. Round the final answers to 2 decimal places.)

Weighted cost
Debt (Kd) %
Preferred stock (Kp)
Common equity (Ke)
Weighted average cost of capital (Ka) %

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

Step: 3

blur-text-image

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

Quantitative Analysis for Management

Authors: Barry Render, Ralph M. Stair, Michael E. Hanna, Trevor S. Ha

12th edition

133507335, 978-0133507331

More Books

Students also viewed these Finance questions

Question

Determine the amplitude and period of each function.

Answered: 1 week ago