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Given the following information for Stellar Corporation, find the WACC (weighted average cost of capital). Assume...

Given the following information for Stellar Corporation, find the WACC (weighted average cost of capital). Assume that the company's tax rate is 40%.

Common Stock: 15 million shares outstanding, selling for $5 per share; the beta is 1.05

Preffered Stock: 5 million shares outstanding, selling for $4.5 per share, pays $ 0.9 annually per share.

Debt: 1 million 8% quarter coupon bonds outstanding, $100 face value, 15 years to maturity, selling at par.

Market: 6.5% market return and 4.5% risk-free rate.

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Answer #1

Using weighted average method to find out the cost of capital for the firm.

Equity No. of shares 15 million Price Value 75 million Cost of equity 0.045+1.05* (0.065-0.045) Cost of equity 0.066 Preferred stock Value Value Cost 4.5*5 million 22.5 million 0.200 Debt 8% (since face value-price) 100 million Cost Value WACC Value Post tax cost ValueX Post tax cost 4.95 4.5 4.8 14.25 Pre tax cost Equi Preferred stock Debt Total 75 22.5 100 197.5 0.066 0.200 0.080 0.066 0.200 0.048 WACC 14.25/197.5 7.22%

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