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Question - The Clarendon based company, We Know Capital Limited (WKC), has been hired as consultants by Christian's Global Importing (CGI) and Hibbert's Alternative Energy (HAE). As an employee of WKC, you have been assigned the responsibility of analysing the weighted average cost of capital of both companies. The relevant details for both companies are as follows:
CGI
HAE
Value of Common Stock
$1,300,000
$2,500,000
Value of Preferred Stock
$800,000
$300,000
Value of Debt
$1,900,000
$1,200,000
Beta
2.2
1.8
Dividend Rate for Preferred Stock
8%
7%
Par Value of Preferred Stock
$115
$105
Price of New Preferred Stock
$95
$85
Yield To Maturity for Bonds
10%
8.4%
The risk-free rate is currently 3.5%, the average market return is 10.5% and the corporate tax rate is 25%.
Required -
i) Calculate the cost of each capital structure component for CGI.
ii) Calculate the cost of each capital structure component for HAE.
iii) Determine the weighted average cost of capital for CGI.
iv) Determine the weighted average cost of capital for HAE.
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