Reference no: EM132744982
You are given the task of calculating the cost of capital of KaBoom Toy Company. The company faces a tax rate of 40%. The company has 100,000 common shares and 10,000 preferred shares outstanding. Each preferred share has a par value of $60, and is currently priced at 90% of the par value. The preferred shares are paying dividends that total 5% of the par value.
You estimate that the beta of the common stock is 1.5. The equity market risk premium is estimated to be 5%, and the risk-free rate is 5%. The company has just paid a dividend of $2 per share.
You expect that the dividends will grow at a rate of 15% until Year 4. After Year 4, the dividends are expected to grow at a constant rate of 5% forever. You decide to employ the CAPM approach to calculate the cost of equity.
The company has two different debt issues that are outstanding.
The first issue consists of 1,000 semi-annual coupon bonds. Each bond has a face value of $1,000. The annual coupon rate is 10%, and the bonds are currently trading at a YTM that equals 12%.
The bonds will mature 10 years from now.
The second issue consists of 1,000 zero coupon bonds. Each bond has a face value of $1,000, and will mature 15 years from now. The zero coupon bonds are trading at 50% of their face value.
Using the information provided above, calculate the weighted average cost of capital of KaBoom Toy Company.
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