Question
You are asked to provide weighted average cost of the capital of the given firm by first finding, the cost of debt, preferred stock, and
You are asked to provide weighted average cost of the capital of the given firm by first finding, the cost of debt, preferred stock, and common stock for the firm. Then find the market-based weights of each component of the cost of capital. Lastly, use the formula to find WACC. The following information is provided.
a) The corporate tax-rate is 40%.
b) The short-term debt is not the part of capital, instead used on seasonal basis to finance receivables and inventories.
c) The long-term debt is 25-year, semiannual coupon paying bond with the coupon rate of 9%. However, currently the yield required by the investors(rd) is 11% on this bond. Alternatively, if the company issues new bonds, then they would have 11% yield to maturity.
d) The required rate of return on the preferred stock is 11% and its pays quarterly dividend of $2. The face value of each preferred stock is $100.
e) The company has 3.8 million shares of common stock outstanding. The market price of its stock is Po = $20. The current dividend that it paid is Do = $1 and the EPSo = $2. The return on average equity is 24% and is constant over time .
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