Question

Given the following information.

 

Percent of capital structure:
Debt		30	%
Preferred stock		30
Common equity		40
Additional information:
Corporate tax rate		34	%
Dividend, preferred		$5.00
Dividend, expected common		$1.50
Price, preferred		$96.00
Corporate growth rate		4	%
Bond yield		11	%
Flotation cost, preferred		$9.50
Price, common		$82.00

 

Calculate the weighted average cost of capital for Johnson 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

a. cost of debt is computed as shown below:

= Bond yield x (1 - tax rate)

= 11% x (1 - 0.34)

= 7.26%

b. Cost of preferred stock is computed as follows:

= Dividend / (Price - flotation cost)

= $ 5 / ($ 96 - $ 9.50)

= $ 5 / $ 86.5

= 5.780346821% or 5.78% Approximately

c. Cost of common equity will be as follows:

= (Expected dividend / price) + growth rate

= ($ 1.50 / $ 82) + 4%

= 5.829268293% or 5.83% Approximately

d. The WACC is computed as follows:

= cost of debt x weight of debt + cost of preferred stock x weight of preferred stock + cost of common equity x weight of common equity

= 7.26% x 0.30 + 5.780346821% x 0.30 + 5.829268293% x 0.40

= 6.24%