Cost of debt = Interest rate(1-tax rate)
=10%(1-0.15)
=10%(0.85)
=8.5%
Cost of preference stock = Dividend/current market price - insurance cost
=7/90-3
=7/87
=8.046%
Cost of equity = D1/(po-insurance cost) + growth rate
D1 = dividend of next year = dividend of current year(1+ growth rate)
=10(1+0.05)
=10(1.05)
=10.5
po= Price of share today = 92
Ke = cost of equity = 10.5/(92 -9.5) + 5%
=10.5/(82.5)+5%
=12.7273%+5%
=17.7273%
Statement showing WACC
Source of capital | Amount | Weight | K | WACC = weight*k |
Bonds | 2000 | 27.78% | 8.50% | 2.36% |
Prefered stock | 1500 | 20.83% | 8.05% | 1.68% |
common stock | 3700 | 51.39% | 17.73% | 9.11% |
7200 | 13.15% |
Thus WACC = 13.15%
The company Davis Travel want to know their WACC and to use it for their projects....
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Please, help with this exercise.
Thanks in advance.
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