Question

$3.20 $70.00 26. Gi ven the following information, calculate the weighted average cost of capital for Puppet Corporation. Percent of Capital Structure 55% 40 Additional Information: 8.5% 7% 2% $1.50 $30.00 Dividend, preferred 5% 3% 4% 6% Corporate tax rate . Part 4: The Capital Budgeting Process a. Calculate the cost of capital assuming use of internally generated funds. b. Calculate the cost of capital assuming use of externally generated funds Why is there a difference? Why does only common equity change? c. 27. Valvano Publishing Company is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Washburn, the vice-president of finance, has given you the following information and asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with an 11 percent coupon rate and a convertible bond with a 7.1 percent rate. The firm has been informed by its fmith and Comnany, that bonds of equal risk and credit 25 a.Calculate WACC using internally generated funds (retained earnings) 26 27 Cost of Debt, AT 281 BeforeTax Cost=YTM 29 After Tax Cost YIM 1-Tx) 30 Cost of Debt adjusted for flotation 3 Cost of Preferred 34 Cost- Dividend Yield- 35 Cost of Preferred adjusted for flotation 36 Divdyid/1-F 37 8 Cost of Common (retained earnings) 9 Cost Div Yild+ growth rate 40 41 éUsing cost of retained earnings 43 45 46 b. Calculate WACC using externally generated equity (new common stock) 47 The only thing that changes is the substitution of the cost of new common 48 49 Cost of New Common SD 51 Cost Cost of Retained Earning 52 Costa F s4 wACC.wd.AdjKd.wp.AdǐKp + we*Kn. Using cost of newly issued common stock 56 57 58 60 61 62 63 65 67 Sheet2 Sheet3+ Sheet Ready

Answer 1

Cost of debt YTM 796 After tax cost of debt 7%*(1-35%) 4.55%*(1-2%) 4.55% AT cost of debt adi for flotation cost 4.46% Cost of Preferred stock 5%)(1-3%) 5.15% Yield Cost of common stock (internal earning) 1.5/30 + 6% 11.00% Yield Debt 55% 4.46% Preferred stock 5% 5.15% Common stock 40% 11.00% WACC 7.11% Cost of debt YTM 796 After tax cost of debt 796"(1-35%) 4.55%*(1-2%) 4.55% AT cost of debt adi for flotation cost 4.46% Cost of Preferred stock 5%)(1-3% 5.15% Yield Cost of common stock (external earning) Cost of retained earnings/(1-flotation cost) 11%/(14%) 11.46% Debt 55% 4.46% Preferred stock 5% 5.15% Common stock 40% 11.46% WACC 7.29%