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Construct the weighted average cost of capital

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Reference no: EM131751222

Suppose you are given the following data of a public firm with the following assets:

  • The firm has an outstanding bond with 5 years of remaining maturity, pays 10% coupon, semiannually. The bond is noncallable and is currently traded for €1,300. The bond has a face value of €1000.  New bonds will be privately placed with no flotation cost.
  • The firm operates in a country where tax rate =30%.
  • The firm has outstanding preferred stock that pays 10%, €100 par value, quarterly dividend, perpetual preferred stock sells for €113.
  • The firm also has common stock currently traded for €100 per share and pays dividend per share (D0) = €3.5 and dividend is growing by 10% per annum. The firm's beta (b) = 1.4; risk-free rate (rRF) = 6%; market risk premium (RPM) = 8%.
  • The firm has long-term and steady capital structure policy as follows: 40% debt, 10% preferred, 50% common equity.

Task: Compute the cost of each asset and construct the weighted average cost of capital for the underlined firm.

Reference no: EM131751222

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