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Johnson Industries finances its projects with 40 percent debt, 10 percent preferred stock, and 50 percent...

Johnson Industries finances its projects with 40 percent debt, 10 percent preferred stock, and 50 percent common stock.

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The company can issue bonds at a yield to maturity of 7.1 percent.

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The cost of preferred stock is 9 percent.

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The company's common stock currently sells for $35 a share.

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The company's dividend has just paid $2.00 a share (D0 = $2.00), and is expected to grow at a constant rate of 5 percent per year.

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Assume that the flotation cost on debt and preferred stock is zero, and no new stock will be issued.

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The company's tax rate is 30 percent


What is the company's weighted average cost of capital (WACC)? Express your answer in percentage (without the % sign) and round it to two decimal places.

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Answer #1

The WACC of this company is :

Debt = 40%

Preference stock = 10%

Equity = 50%

Yield to maturity = 7.1%

Cost of prefernce stock = 9%

Cost of common stock =

Re = D1/ PO + G

=$2 *1.05/ $35 + 0.05

=11%

So, the WACC is :

weight of debt * after tax cost of debt + weight of prefernce stock*cost of preference stock + weight of equity *cost of equity

= 0.4* 0.071* (1- 0.3)  + 0.1*0.09 + 0.5*0.11

=0.0199+ 0.009 + 0.055

= 8.39 ( rounded off to two decimal places)

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