Homework Answers
Answer a.
Cost of Common Stock = Expected Dividend / Current Price +
Growth Rate
Cost of Common Stock = $1.50 / $30.00 + 0.08
Cost of Common Stock = 0.05 + 0.08
Cost of Common Stock = 0.13 or 13.00%
Answer b.
Cost of Preferred Stock = Annual Dividend / Current Price
Cost of Preferred Stock = $10.00 / $75.00
Cost of Preferred Stock = 0.1333 or 13.33%
Answer c.
Face Value = $1,000
Current Price = $880
Annual Coupon Rate = 7.00%
Annual Coupon = 7.00% * $1,000
Annual Coupon = $70
Time to Maturity = 12 years
Let Annual YTM be i%
$880 = $70 * PVIFA(i%, 12) + $1,000 * PVIF(i%, 12)
Using financial calculator:
N = 12
PV = -880
PMT = 70
FV = 1000
I = 8.65%
Annual YTM = 8.65%
Cost of Debt = 8.65%
Answer d.
WACC = Weight of Debt * Cost of Debt * (1 - Tax Rate) + Weight
of Preferred Stock * Cost of Preferred Stock + Weight of Common
Stock * Cost of Common Stock
WACC = 0.20 * 8.65% * (1 - 0.40) + 0.10 * 13.33% + 0.70 *
13.00%
WACC = 1.04% + 1.33% + 9.10%
WACC = 11.47%
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optimal capital structure is composed of the sources and target
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estimated to be13%; and the cost of new common stock is estimated
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