User Account

All Pages

Determining cost of capital-weighted average cost of capital

Assignment Help Financial Management
Reference no: EM131185059

Determining the Cost of Capital: Weighted Average Cost of Capital

The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings is used in the firm's WACC calculation. However, if the firm will have to issue new common stock, the cost of new common stock should be used in the firm's WACC calculation.

Quantitative Problem: Barton Industries expects that its target capital structure for raising funds in the future for its capital budget will consist of 40% debt, 5% preferred stock, and 55% common equity. Note that the firm's marginal tax rate is 40%. Assume that the firm's cost of debt, rd, is 7.7%, the firm's cost of preferred stock, rp, is 7.2% and the firm's cost of equity is 11.7% for old equity, rs, and 12.51% for new equity, re.

What is the firm's weighted average cost of capital (WACC1) if it uses retained earnings as its source of common equity? Round your answer to 3 decimal places. Do not round intermediate calculations.

%

What is the firm’s weighted average cost of capital (WACC2) if it has to issue new common stock? Round your answer to 3 decimal places. Do not round intermediate calculations.

%

Reference no: EM131185059

Questions Cloud

What will be the payoff of the call : You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly three months’ time. a. If the stock is trading at $55 in three months, what will be the payoff of the call? Show all work. b. If the stock is trading ..
About the portfolio return : Year-to-date, Oracle had earned a −1.35 percent return. During the same time period, Valero Energy earned 7.53 percent and McDonald's earned 0.34 percent. If you have a portfolio made up of 20 percent Oracle, 30 percent Valero Energy, and 50 percent ..
What is its yield to maturity : A 7-year, 10.00% semiannual coupon bond with a par value of $1000 may be called in 6 years at a call price of $1,200.00. The bond sells for $990.50. (Assume that the bond has just been issued.). What is its yield to maturity? show work
Determining the cost of capital-cost of debt : A firm's before-tax cost of debt, rd, is the interest rate that the firm must pay on -Select-outstandingsecurednewItem 1  debt. Because interest is tax deductible, the relevant cost of -Select-outstandingsecurednewItem 2  debt used to calculate a fir..
Determining cost of capital-weighted average cost of capital : The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these compone..
Determining the cost of capital-cost of new common stock : If a firm plans to issue new stock, flotation costs (investment bankers' fees) should not be ignored. There are two approaches to use to account for flotation costs. The first approach is to add the sum of flotation costs for the debt, preferred, and..
What should the required rate of return be for this project : Bruno's is an all-equity firm with 20,000 shares of stock outstanding. The stock has a beta of 1.3 and a standard deviation of 8 percent. The market risk premium is 6.5 percent and the risk-free rate of return is 2 percent. The company is considering..
Produce state-of-the-art car stereo systems : A new company to produce state-of-the-art car stereo systems is being considered by Keith Richards Enterprises. The sales price would be set at 1.5 times the variable cost per unit; the VC/unit is estimated to be $2.50; and fixed costs are estimated ..
Share stock price be immediately after the repurchase : The following data apply to Johnny’s Electrical Equipment: Value of operations $20B Short-term investments $ 1B Debt $ 6B Number of shares 300M The company plans on distributing $50 million by repurchasing stock. What will the intrinsic per share sto..

Reviews

Write a Review

Financial Management Questions & Answers

  Explain the results in terms of time value of money

Bob and Lisa are both married, working adults. They both plan for retirement and consider the $2,000 annual contribution a must. First, consider Lisa’s savings. She began working at age 20 and began making an annual contribution of $2,000 at the firs..

  Planning on increasing its annual dividend

The Know-It-All Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% per year. The company just paid its annual divi..

  Sale of an asset that is depreciable and used in business

A loss on the sale of an asset that is depreciable and used in business is ________; a loss on the sale of a non-depreciable asset is ________.

  What is this employee benefit worth to you today

Your employer contributes $50 a week to your retirement plan. Assume that you work for your employer for another 20 years and that the applicable discount rate is 9 percent. Given these assumptions, what is this employee benefit worth to you today?

  Use the equivalent annual cost approach to evaluate

A company wishes to select the best of three possible computers, each expected to meet the University's growing need for computational and storage capacity. The three computers— A, B, and C—are equally risky. Calculate the NPV for each computer over ..

  Future value for various compounding periods

Find the amount to which $700 will grow under each of the following conditions. Round your answer to the nearest cent. 7% compounded annually for 5 years

  What is maggies total profit from a long straddle position

What is Maggie's total profit or loss from a long straddle position? What is Maggie's total profit or loss from a long straddle position if the value of the dollar is 0.60 euro at option expiration?

  What is the net asset value of the fund

The composition of the Fingroup Fund portfolio is as follows: Stock Shares Price A 370,000 $35 B 470,000 40 C 570,000 10 D 770,000 15 The fund has not borrowed any funds, but its accrued management fee with the portfolio manager currently totals $30,..

  Determine the constant growth rate in dividends

Arbitrage Financial is offering two possible investments with the same level of risk.

  How the market would set the yield to maturity

Blue Crab, Inc. plans to issue new bonds, but is uncertain how the market would set the yield to maturity. The bonds would be 19-year to maturity, carry a 13.29 percent annual coupon, and have a $1,000 par value. Blue Crab, Inc. has determined that t..

  Cofounded last year is growing rapidly

The company you cofounded last year is growing rapidly and has strong prospects for an IPO in the next year or two. The additional capital that an IPO could raise would let you hire the brightest people in the industry and continue to innovate with n..

  Future value of this cash flow stream

If you receive $2,590 at the end of each year for the first three years and $627 at the end of each year for the next two years. What is the future value of this cash flow stream? Assume interest rate is 6%.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd