Question

3. A company wishes to raise funds to start a new division. The total amount needed is 30 million. There will be three major sources: common stock, bonds and retained earnings. 12 million will come from common stock, 14 million will come from bonds and the rest from retained earnings. The bonds will offer a 6% per year rate compounded quarterly. The retained earnings and common stock will be based on yearly dividends of 50 cents per share with price per share of 15.00. The income tax rate is 40% (combined federal and local). What is the weighted cost of capital? You must show detailed intermediate results.

please respond asap. short answers appriciated thank you kindly.

Answer 1

cost of debt=(1+(6%/4))^4-1=6.14%

cost of equity=0.50/15=3.33%

weighted average cost of capital

=weight of debt*cost of debt*(1-tax rate)+weight of equity*cost of equity

=(14/30)*6.14%*(1-40%)+(16/30)*3.33%

=3.50%

the above is answer..