ABC Corporation has the following capital structure: Debt &nbs
ABC Corporation has the following capital structure:
Debt $35 million
Preferred Stock $20 million
Common Equity (Retained Earnings) $45 million
Yield to maturity = 12%
Tax rate = 40%
After-tax cost of debt = 7.2%
Cost of preferred stock = 8.93%
Next year dividends = $ 4share
Growth Rate = 10%
Current Price = $45/share
Cost of retained earnings = 18.89%
Risk-free rate = 5%
Return the (stock) Market = 12%
Beta = 1.5
Cost of Equity = 15.5%
Calculate the Weighted Average Cost of Debt (WACC). For the cost of retained earnings, please use the cost from Dividend Valuation Model.
Homework Answers
Market Value of each capital Components
Market Value of Debt = $35 Million
Market Value of Preferred Stock = $20 Million
Market Value of Equity = $45 Million
Total Market Value = $100 Million
The weights that would be used for a weighted average cost of capital (WACC) computation.
Weight of Debt = 0.35 [$35 Million / $100 Million]
Weight of Preferred Stock = 0.20 [$20 Million / $100 Million]
Weight of Equity = 0.45 [$45 Million / $100 Million]
After-tax Cost of Debt
The After-tax Cost of Debt is the after-tax Yield to maturity of the Bond
After Tax Cost of Debt = Yield to maturity x (1 – Tax Rate)
= 12.00% x (1 – 0.40)
= 12.00% x 0.60
= 7.20%
Cost of Preferred Stock = 8.93% (Given)
Cost of Equity
Here, we have Dividend per share in year 1 (D1) = $4.00 per share
Dividend Growth Rate (g) = 10.00% per year
Current market price of the stock (P0) = $45.00 per share
As per the Dividend Valuation Model, the Cost of equity is calculated as follows
Cost of equity = [D1 / P0] + g
= [$4.00 / $45.00] + 0.10
= 0.0889 + 0.10
= 0.1889 or
= 18.89%
Weighted Average Cost of Capital (WACC)
Weighted Average Cost of Capital (WACC) = [After Tax Cost of Debt x Weight of Debt] + [Cost of Preferred stock x Weight of preferred stock] + [Cost of equity x Weight of Equity]
= [7.20% x 0.35] + [8.93% x 0.20] + [18.89% x 0.45]
= 2.52% + 1.79% + 8.50%
= 12.81%
“Hence, the Weighted Average Cost of Debt (WACC) will be 12.81%”
Given the following information: Percent of capital structure: Debt Preferred stock Common equity (retained earnings) 35...
Given the following information: Percent of capital structure: Debt Preferred stock Common equity (retained earnings) 35 20 45 Additional information: Bond coupon rate Bond yield to maturity Dividend, expected common Dividend, preferred Price, common Price, preferred Flotation cost, preferred Growth rate Corporate tax rate 91 s 5.00 S 12.00 s 60.00 $106.00 S 4.50 61 25t Calculate the Hamilton Corp's weighted cost of each source intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) of capital...
Given the following information: Percent of capital structure: 20% Debt Preferred stock Common equity (retained earnings)...
Given the following information: Percent of capital structure: 20% Debt Preferred stock Common equity (retained earnings) Additional information: Bond coupon rate Bond yield to maturity Dividend, expected common Dividend, preferred Price, common Price, preferred Flotation cost, preferred Growth rate Corporate tax rate 8% 6% $ 2.00 $ 9.00 $ 45.00 $114.00 $ 7.50 28 40% Calculate the Hamilton Corp.'s weighted cost of each source of capital and the weighted average cost of capital. (Do not round Intermediate calculations. Input your...
Given the following information: Percent of capital structure: Debt 15% Preferred stock Common equity (retained earnings)...
Given the following information: Percent of capital structure: Debt 15% Preferred stock Common equity (retained earnings) 10 75 Additional information: Bond coupon rate Bond yield to maturity Dividend, expected common Dividend, preferred Price, common Price, preferred Flotation cost, preferred Growth rate Corporate tax rate 5% 4% $ 2.00 $ 9.00 $ 45.00 $130.00 %$4 2.20 7% 35% Calculate the Hamilton Corp's weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate calculations....
Given the following information: Percent of capital structure: 25% Preferred stock Common equity (retained earnings) Debt...
Given the following information: Percent of capital structure: 25% Preferred stock Common equity (retained earnings) Debt 30 45 Additional information: 34% $ 6.00 $ 3.50 $ 96.00 Corporate tax rate Dividend, preferred Dividend, expected common Price, preferred Growth rate Bond yield Flotation cost, preferred Price, common 4% $10.20 $81.00 Calculate the weighted average cost of capital for Digital Processing Inc. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt Preferred...
Rollins Corporation has a target capital structure consisting of 20% debt, 20% preferred stock, and 60%...
Rollins Corporation has a target capital structure consisting of 20% debt, 20% preferred stock, and 60% common equity. Assume the firm has insufficient retained earnings to fund the equity portion of its capital budget. It has 20-year, 12% semiannual coupon bonds that sell at their par value of $1,000. The firm could sell, at par, $100 preferred stock that pays a 12% annual dividend, but flotation costs of 5% would be incurred. Rollins’ beta is 1.2, the risk-free rate is...
Given the following information: Percent of capital structure Preferred stock Common equity (retained earnings) Debt 25%...
Given the following information: Percent of capital structure Preferred stock Common equity (retained earnings) Debt 25% 35 40 eBook Additional information: Corporate tax rate Dividend, preferred Dividend, expected common Price, preferred Growth rate 30% 12.00 $ 7.50 $95.00 10% 12% Bond yield Flotation cost, preferred Price, common $ 8.50 80.00 Calculate the weighted average cost of capital for Digital Processing Inc. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt...
Hel Given the following information: Percent of capital structure: Preferred #toek Comnon equity (retained earnings) Debt...
Hel Given the following information: Percent of capital structure: Preferred #toek Comnon equity (retained earnings) Debt 358 45 20 eBook Adltionalinformation: Corporate tax rate Dividend, preferred Dividend, expected common $ 3.50 Price, preferzed Growth rate Bond yield rlotation coat, preterred 4.50 Price, common $ 8.00 $110.00 6 85.00 Calculate the weighted average cost of capital for Digital Processing Inc. (Do not round intermediate ca answers as a percent rounded to 2 decimal places) intermediate calculations. Input your Weighted Cost Debt...
Turnbull Co. has a target capital structure of 58% debt, If its current tax rate is...
Turnbull Co. has a target capital structure of 58% debt, If its current tax rate is 40%, how much higher will 6% preferred stock, and 36% common equity. It has a Turnbull's weighted average cost of capital (WACC) be if before-tax cost of debt of 8.2%, and its cost of preferred it has to raise additional common equity capital by stock is 9.3%. issuing new common stock instead of raising the funds through retained earnings? If Turnbull can raise all...
Given the following information: Percent of capital structure: Preferred stock Common equity (retained earnings) Debt Additional...
Given the following information: Percent of capital structure: Preferred stock Common equity (retained earnings) Debt Additional information: Corporate tax rate Dividend, preferred Dividend, expected common Price, preferred Growth rate Bond yield Flotation cost, preferred Price, common 35% $ 10.00 $ 5.5e $106.ee 103 $ 6.50 $89.00 Calculate the weighted average cost of capital for Digital Processing Inc. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt Preferred stock Common equity...
Given the following information: Percent of capital structure: Debt Preferred stock Common equity (retained earnings) 35 20 45 Additional information: Bond coupon rate Bond yield to maturity Dividend, expected common Dividend, preferred Price, common Price, preferred Flotation cost, preferred Growth rate Corporate tax rate 91 s 5.00 S 12.00 s 60.00 $106.00 S 4.50 61 25t Calculate the Hamilton Corp's weighted cost of each source intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) of capital...
Given the following information: Percent of capital structure: 20% Debt Preferred stock Common equity (retained earnings) Additional information: Bond coupon rate Bond yield to maturity Dividend, expected common Dividend, preferred Price, common Price, preferred Flotation cost, preferred Growth rate Corporate tax rate 8% 6% $ 2.00 $ 9.00 $ 45.00 $114.00 $ 7.50 28 40% Calculate the Hamilton Corp.'s weighted cost of each source of capital and the weighted average cost of capital. (Do not round Intermediate calculations. Input your...
Given the following information: Percent of capital structure: Debt 15% Preferred stock Common equity (retained earnings) 10 75 Additional information: Bond coupon rate Bond yield to maturity Dividend, expected common Dividend, preferred Price, common Price, preferred Flotation cost, preferred Growth rate Corporate tax rate 5% 4% $ 2.00 $ 9.00 $ 45.00 $130.00 %$4 2.20 7% 35% Calculate the Hamilton Corp's weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate calculations....
Given the following information: Percent of capital structure: 25% Preferred stock Common equity (retained earnings) Debt 30 45 Additional information: 34% $ 6.00 $ 3.50 $ 96.00 Corporate tax rate Dividend, preferred Dividend, expected common Price, preferred Growth rate Bond yield Flotation cost, preferred Price, common 4% $10.20 $81.00 Calculate the weighted average cost of capital for Digital Processing Inc. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt Preferred...
Given the following information: Percent of capital structure Preferred stock Common equity (retained earnings) Debt 25% 35 40 eBook Additional information: Corporate tax rate Dividend, preferred Dividend, expected common Price, preferred Growth rate 30% 12.00 $ 7.50 $95.00 10% 12% Bond yield Flotation cost, preferred Price, common $ 8.50 80.00 Calculate the weighted average cost of capital for Digital Processing Inc. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt...
Hel Given the following information: Percent of capital structure: Preferred #toek Comnon equity (retained earnings) Debt 358 45 20 eBook Adltionalinformation: Corporate tax rate Dividend, preferred Dividend, expected common $ 3.50 Price, preferzed Growth rate Bond yield rlotation coat, preterred 4.50 Price, common $ 8.00 $110.00 6 85.00 Calculate the weighted average cost of capital for Digital Processing Inc. (Do not round intermediate ca answers as a percent rounded to 2 decimal places) intermediate calculations. Input your Weighted Cost Debt...
Turnbull Co. has a target capital structure of 58% debt, If its current tax rate is 40%, how much higher will 6% preferred stock, and 36% common equity. It has a Turnbull's weighted average cost of capital (WACC) be if before-tax cost of debt of 8.2%, and its cost of preferred it has to raise additional common equity capital by stock is 9.3%. issuing new common stock instead of raising the funds through retained earnings? If Turnbull can raise all...
Given the following information: Percent of capital structure: Preferred stock Common equity (retained earnings) Debt Additional information: Corporate tax rate Dividend, preferred Dividend, expected common Price, preferred Growth rate Bond yield Flotation cost, preferred Price, common 35% $ 10.00 $ 5.5e $106.ee 103 $ 6.50 $89.00 Calculate the weighted average cost of capital for Digital Processing Inc. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt Preferred stock Common equity...
Most questions answered within 3 hours.
-
A 8.15- g bullet from a 9-mm pistol has a velocity of 366.0 m/s.
It strikes...
asked 1 hour ago -
The outstanding bonds of Alpha Extracts have a yield to maturity
of 7.4 percent and a...
asked 1 hour ago -
The Problem: The Case of the Harmonizing Vacations
Your CEO is exploring partnering with a European...
asked 2 hours ago -
A chemical equation is balanced by adding coefficients in front
of some formulas so that the...
asked 2 hours ago -
From the literature (reference your sources): What are the
lattice parameters of calcite and aragonite? Why...
asked 3 hours ago -
Your system is rejecting the question am asking which is
preceded by a case study. It...
asked 3 hours ago -
3. On January 2, 2000, Larry creates a trust with himself as
trustee. Larry as trustee...
asked 3 hours ago -
A member of the volleyball team spikes the ball. During this
process, she changes the velocity...
asked 3 hours ago -
Are adult gamers less likely to use a gaming console (Xbox,
PlayStation, Wii, etc...) than teen...
asked 4 hours ago -
The University of
Texas recently reported that 43% of college students aged 18-24
would spend their...
asked 4 hours ago -
The length of stay at a specific emergency department in
Phoenix, Arizona, in 2009 had a...
asked 3 hours ago -
. Please give the mechanism for this type of problem. Step by
Step
The toxin that...
asked 3 hours ago