Question

Given the following information.

Percent of capital structure:
Debt		20	%
Preferred stock		30
Common equity		50
Additional information:
Corporate tax rate		40	%
Dividend, preferred		$8.00
Dividend, expected common		$3.50
Price, preferred		$103.00
Corporate growth rate		8	%
Bond yield		9	%
Flotation cost, preferred		$7.20
Price, common		$78.00

Calculate the weighted average cost of capital for Hadley Corporation. Line up the calculations in the order shown in Table 11–1. (Round intermediate calculations to 2 decimal places. Round the final answers to 2 decimal places.)

	Weighted Cost
Debt (Kd)	%
Preferred stock (Kp)
Common equity (Ke)
Weighted average cost of capital (Ka)	%

Answer 1

Weighted cost of each source of capital

	Weighted Cost
Debt	1.08%
Preferred Stock	2.51%
Common Equity	6.24%
Weighted average cost of capital	9.83%

Cost of Debt

Cost of Debt = Bonds Yield x (1 – Tax Rate)

= 9.00% x (1 – 0.40)

= 9.00% x 0.60

= 5.40%

Weighted Cost = 1.08% [5.40% x 0.20]

Cost of Preferred Stock

Cost of Preferred Stock = Preferred Dividend / [Price of Preferred stock – Flotation cost]

= [$8.00 / ($103.00 - $7.20)]

= [$8.00 / $95.80]

= 0.0835 or

= 8.35%

Weighted Cost = 2.51% [8.35% x 0.30]

Cost of Common Stock

Using Dividend Discount Model, the Cost of Common Stock = [D1 / P0] + g

= [$3.50 / $78.00] + 0.08

= 0.0449 + 0.08

= 0.1249 or

= 12.49%

Weighted Cost = 6.24% [12.49% x 0.50]

Weighted Average Cost of Capital

Therefore, the Weighted Average Cost of Capital = Weighed Cost of Debt + Weighted Cost of Preferred stock + Weighted cost of Common Stock

= 1.08% + 2.51% + 6.24%

= 9.83%

“Hence, the weighted average cost of capital for Hadley Corporation will be 9.83%”