Question

كلية الإمارات للتكنولوجيا Emirates College of Technology Yer TCHACARD (2x4-Marks Group Work # (2) Question (1): Consider the following facts provided for ALFA Corporation: Bank Debt information: - rd. Interest rate on bank loans 12 % - T: Annual Tax rate 20% - • - Preferred stock information: D : Annual Dividends on preferred stock $ 15 P: Issuing price of ALFA Corporation preferred Stock $ 120 FC: Flotation cost on issue of preferred stock/per share $ 3 Common Stock information: - Rp! Market risk Free Rate 6% - RP: Expected Market Risk Premium 4 % - b: ALFA stocks beta coefficient index of the stocks risk) 1.0 >> ALAFACorporation plans to get new fund for a new project; the project financing will be allocated according to the following capital structure: Weight of Debt Wa: 40% Weight of Preferred Stock W : 40% Weight of Common Stock W: 20% Required: a. Calculate the cost of debt. b. Calculate the cost of preferred stock. c. Calculate the cost of common stock. d. Calculate the weighted average cost of capital (WACC 1).

Answer 1

Question 1]

a]

cost of debt = pretax cost of debt * (1 - tax rate)

pretax cost of debt = bank interest rate = 12%

cost of debt = 12% * (1 - 20%) = 9.60%

b]

Cost of preferred stock = annual dividends / net proceeds per share

net proceeds per share = issue price - flotation cost = $120 - $3 = $117

Cost of preferred stock = $15 / $117 = 12.82%

c]

cost of common stock = risk free rate + (beta * market risk premium)

cost of common stock = 6% + (1 * 4%) = 10%

d]

WACC = (weight of debt * cost of debt) + (weight of preferred stock * cost of preferred stock) + (weight of common stock * cost of common stock)

WACC = (40% * 9.60%) + (40% * 12.82%) + (20% * 10%)

WACC = 10.97%