Homework Answers
rate positively ..
| ans A) | Computation of cost of common stock | |||||||
| Cost of common stock = Dividend next year/Price today + growth rate | ||||||||
| 1.5/30+8% | ||||||||
| 13.00% | ||||||||
| ans B) | Cost of prefrred stock = Annual dividend/Price today | |||||||
| 10/75 | ||||||||
| 13.33% | ||||||||
| ans C) | Cost of debt | |||||||
| we have to use financial calculator - | ||||||||
| FV | 1000 | |||||||
| PV | -880 | |||||||
| PMT | 1000*7% | 70 | ||||||
| N | 12 | |||||||
| Compute I | 8.65% | |||||||
| Post tax cost of debt = 8.65%*(1-40%) | 5.19% | |||||||
| ans D) | WACC | |||||||
| Source | Weight | cost | Weight * cost | |||||
| Debt | 20% | 5.19% | 1.04% | |||||
| Preferred stock | 10% | 13.33% | 1.33% | |||||
| Common equity | 70% | 13.00% | 9.10% | |||||
| 11.47% | ||||||||
| WACC = | 11.47% | |||||||
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