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Calculate the weighting of equity in the company

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You are provided with the following particulars regarding a firm's capital structure:

  1. The firm has debt of $3,000,000 (par value) of 9% bonds outstanding with an annual before-tax yield to maturity of 8.5% on a new issue.
  2. The bonds currently sell for $125 per $100 par value.
  3. The firm has 40,000 ordinary shares currently selling for $40 per share.
  4. The firm expects to pay a $7.50 dividend per share one year from now and is experiencing a 3.5% growth rate in dividends, which it expects to continue indefinitely
  5. The firm's marginal tax rate is 30%.

Question 1: Separately calculate the following components of Weighted Average Cost of Capital:

a. The weighting of debt in the company's capital structure (D%)

b. The weighting of equity in the company's capital structure (E%)

c. The cost of ordinary shares (rE )

d. The post-tax cost of debt (rD (1-TC))

Reference no: EM132545615

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