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

Balance Sheet of a public limited firm ABC (amount in million $) Cash $15 Accounts payable Accounts receivable 20 Accruals Inventories 20 Short-term debt Current assets $55 Current Liabilities Net fixed assets 45 Long-term debt Preferred stock Common stock Retained earnings Total common equity Total Assets $100 Total Liabilities and equity $15 10 5 $30 25 7 $8 30 $38 $100