1) Change in WACC = weight of equity x (Cost of new equity - Cost of retained) = 51% x (16.8% - 14.7%) = 1.07%
2)
Market Value | Weight | Cost | |
Debt | 230,000 | 40% | 11.10% |
Preferred | 20,000 | 4% | 12.20% |
Equity | 320,000 | 56% | 14.70% |
Total | 570,000 | WACC | 11.37% |
WACC = wd x rd x (1 - tax) + wp x rp + we x re
= 40% x 11.10% x (1 - 40%) + 4% x 12.20% + 56% x 14.70%
= 11.37%
3)
Weight | Cost | |
Debt | 58% | 8.70% |
Preferred | 6% | 8.67% |
Equity | 36% | 22.02% |
WACC | 11.48% |
Cost of debt can be calculated using I/Y function on a calculator
N = 5, PMT = 10% x 1000 = 100, PV = -1050.76, FV = 1000
=> Compute I/Y = 8.70% = rd
Cost of preferred, rp = Dividend / Price = 8 / 92.25 = 8.67%
Cost of equity, re = D1 / (P x (1 - f)) + g = 2.78 / (22.35 x (1 - 3%)) + 9.2% = 22.02%
=> WACC = wd x rd x (1 - tax) + wp x rp + re x we
= 58% x 8.70% x (1 - 40%) + 6% x 8.67% + 36% x 22.02%
= 11.48%
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