The current capital structure of stewart-line corporation is as follows: Bonds (7 %, $1000 par 15...
The current capital structure of stewart-line corporation is as follows:
Bonds (7 %, $1000 par 15 years) $75,000
Preferred stock ($100 par, 7.25% dividend) $1,000,000
Common stock:
Par value ($2.50 par) $500,000
Retained earnings $350,000
Total 850,000
Other information about stewart-line corportation:
The market price is $975 for the bonds, $60 for the preferred stock, and $21 for common stock. Flotation costs are 9% for bonds and 5% for preferred stock. The firm’s tax rate is 46%. Common stock will pay a $2.80 dividend which is not expected to grow.
- Calculate the weighted cost of capital using only internal common equity
- Why do we need to determine the firm’s overall weighted cost of capital and not just the individual component cost of capital?
Homework Answers
a)Cost of internal common equity= dividend/stock price
=2.8/21=13.33%
b)we need to find the overall weighted cost of capital and need to
use this as discount rate since each component has different risk
associated with it and based on weight of each the overall cost
will differ
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The current capital structure of
stewart-line corporation is as follows:
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