To finance the purchase RM will sell 10 year bonds paying 6.9% per year at the m

Question

To finance the purchase RM will sell 10 year bonds paying 6.9% per year at the market price of $1,061. Preferred stock paying a $2.05 dividend can be sold for $25.41. Current stock for RM is currently selling for $54.96 per share and the firm paid a $3.02 dividend last year. Dividends are expected to continue to grow at a rate of 4.9% per year into the indefinite future. If the firm's tax rate is 30%, RM's WACC is ______% (Round to three decimal places)
Source of Capital Market Values
Bonds 3,600,000
Preferred Stock 1,800,000
Common Stock 6,100,000

Explanation / Answer

after tax cost of capital for bond = 6.9%*(1-0.3) = 4.83% cost of capital for preffered stock = (54.96-25.41+2.05)/25.41 = 12.43% WACC = 4.83%+12.43% = 17.26%

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