Question

Homework Problem Cost of Capital The following balance sheet reflects market values of the target proportions of Firm A's capital structure, Assets $256,334 Debt $ 87,154 Pref Stk $ 25,633 Com. Stk $143,547 Firm A plans to finance the planned projects from the following sources: Debt: Existing bonds of similar risk and maturity have an annual coupon of 6.5 percent, paid semiannually, mature in 10 years, and currently sell for $987.45. The firm's marginal tax rate is 34% Preferred Stock: The firm plans to issue 10% preferred stock with a par value of $30. The shares are expected to sell for $40. Common Stock: The firm will issue new shares to provide the common stock portion of financing. The most recent dividend, D, was $2.85 and that dividend is expected to grow at 2.5 percent per year. The current share price is $45.80. (Hint: Use the dividend discount model (p. 10 in the PP slides) to estimate the cost of common stock. D. -D.(1 + g)). Using this information, estimate Firm A's weighted average cost of capital. Show all calculations for the weights, the component costs of capital, and the WACC (interim results for component costs in percent to three decimal places and cost of capital to two decimal places, (e.g. K, -6.352%, WACC -8.25%). For the cost of debt, list all the keystrokes and values input to the financial calculator, e.g. PV - xxxx, PMT-yyy, etc. Do all calculations on this sheet in pencil Check Answers: W,-0.34, W, -0.10, W, -0.56, K.-6.660%, K, = 7.500%, K.-8.878% WACC -7.22%

Answer 1

DATE Answer » Capital structure Source of funds Amt Weights Dest 87184 0:34 preferred stock 25 633 EE 0.10 Common stock 143,547 0.56 256334 Cost of preference shares Clep kp = preference Dividend price of share kp = 107. (x$30 = 1.50% $40 kef= 7.50 % cost of Equity shares Equity shares (ke) a les Do (1+42 keing Do = current dividend be - price of stock ke - cost of Equity $45.80 2.85 (1 + 7.507.) Tac-12.50% ke = 8.878% cs Scanned with CamScanner classmate PAGE

DATE Cost of Debt (ka) Утта Coupon ft) [Ruti Bo RV- Redeemable Value years . to maturity Bo - na [ Ru el Bo price of Bond. 2 YTM = $100000Į (4) 6.50%. As [lo 1000 6 987.45 [lo 1000 ft) 987.45 10 (x) 2 987.45] 2 yama $32.5 (t) $0.625 $993-725 yoma 3.283%(seni Arnul) Armuel you 6.566% (3.2827.692) WACC- We aske (f Would (t) wparkp WACC = 0.58 (*) 8.878 ya W 0:34 AD 65864.83(1-347.) H3 O loc 7: soy INACC - 4,97 % 62 1.47347 (t) 0.759. Ansur. NACC= 7.1934% as scanned with CamScanner