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 .
cash 15
recievables 20
inventory 20
assets 55
fixed assets 45
total assets 100
accounts payable 15
accruals 10
shiert term debt 5
current liabilities 30
long term debt 25
preferred stock 7
common stock 8
retained earnings 30
total common equity 38
total liabilities and equity 100
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