Calculate the weighted average cost of capital

Assignment Help Financial Accounting

Reference no: EM13830313

Calculate the weighted average cost of capital in the given case.

Based on the information below, calculate the weighted average cost of capital.

Great Corporation has the following capital situation.
Debt: One thousand bonds were issued five years ago at a coupon rate of 8%. They had 25-year terms and $1,000 face values. They are now selling to yield 9%. The tax rate is 39%
Preferred stock: Two thousand shares of preferred are outstanding, each of which pays an annual dividend of $7.50. They originally sold to yield 15% of their $50 face value. They're now selling to yield 8%.
Equity: Great Corp has 133,000 shares of common stock outstanding, currently selling at $12.48 per share. Dividend expected for next year is $.80 and the growth rate is 6%.

Let us calculate current value of bond.

Tax Rate=T=39%
Required rate of return=rd=9%
Coupon payment=C=1000*8%=$80
Number of coupon payments left=n=20
Maturity amount of bond=M=Face Value=$1000
Fair price of a bond is given as
Current price of bond=C/r*(1-1/(1+r)^n)+M/(1+r)^n
=80/9%*(1-1/(1+9%)^20)+1000/(1+9%)^20
=$908.71454

Current Market value of debt=Md=908.71454*1000=$908,714.54

Let us now calculate Market Value of preferred stock.

Constant Dividend of preferred stock=Dp=$7.50
Current Yield of preferred stock=rp=8%
Current Price of stock=D/rp=7.50/8%=$93.75

Current Market Value of preferred stock=Mp=93.75*2000=$187,500
Current market value of common stock=Mc=12.48*133000=$1,659,840

Now we calculate the cost of equity

D1=$0.80
Growth rate=g=6%
Rate of return on common stock=rc=(D1/Po)+g=(0.80/12.48)+6%=12.41%
Total Market Value of firm=M=Md+Mp+Mc=908714.5+187500+1659840=$2,756,055

Weighted average cost of capital,WACC is given by

WACC=(Md/M)*rd*(1-T)+(Mp/M)*rp+(Mc/M)*rc
=(908714.5/2756055.54)*9%*(1-39%)+(187500/2756055.54)*8%+(1659840/2756055.54)*12.41%
=9.83%

Reference no: EM13830313

Questions Cloud

Changing temperature according to newton law of cooling : A hot bowl of soup is served at a dinner party. It starts to cool according to Newton's Law of Cooling so that its temperature at time t is given by

Describe each of silly sallys sampling assumption and audit : Describe each of Silly Sally's Sampling Assumptions and Audit Slip-ups

Create a blog entry in blackboard : Create a blog entry in Blackboard in which you describe the experience and ways in which you might use the results to enhance your students' learning environments

Finding angles of a triangle with the law of sines : Sketch the triangle and then solve the triangle using the Law of Sines. Please round the answer to the nearest tenth. ∠A = 23°, ∠B = 100°, c = 50

Calculate the weighted average cost of capital : Great Corporation has the following capital situation.Debt: One thousand bonds were issued five years ago at a coupon rate of 8%. They had 25-year terms and $1,000 face values. They are now selling to yield 9%. The tax rate is 39%

Determining the equation for the parabola : Find an equation for the parabola that has its vertex at the origin and satisfies the given condition.

Finding amounts missing from the stockholders'' equity : Question 1 Finding Amounts Missing from the Stockholders' Equity Section 2013 Shareholders' equity: Preferred stock, $100 Par 15,000 Paid-in Capital in Excess of Par - Preferred Stock 3,000

Find the angle between : Find an angle between 0 and 2π that is coterminal with the given angle.

Classification of carcinogens by the international agency : The topic for this unit was the classification of carcinogens by the International Agency for Research on Cancer (IARC). For this assignment, pick a group 1 carcinogen from the IARC

User Account

All Pages