Based on the information below, calculate the weighted average cost of capital.

Question

Based on the information below, calculate the weighted average cost of capital. Great Corporation has the following capital situation. Debt: One thousand bonds were issued five years ago at a coupon rate of 8%. They had 25-year terms and $1,000 face values. They are now selling to yield 9%. The tax rate is 36% Preferred stock: Two thousand shares of preferred are outstanding, each of which pays an annual dividend of $7.50. They originally sold to yield 15% of their $50 face value. They're now selling to yield 8%. Equity: Great Corp has 125,000 shares of common stock outstanding, currently selling at $14.48 per share. Dividend expected for next year is $1.00 and the growth rate is 5%. I need the numerical answer please. :-)

Explanation / Answer

Great Corp MV Cost Weight WACC Bonds 908714.5 0.0576 0.31268 0.01801 Preferred Stock 187500 0.08 0.064517 0.005161 Common Stock 1810000 0.1190608 0.622803 0.074151 2906215 9.73% Market Value of bond 1-20 80 9.1285457 730.2837 20 1000 0.1784309 178.4309 MV 908.71 Market value of preferred stock 93.75 Cost of common stock 0.119061 2 Part 1 TGT WMT Profit Margin 4.09% 3.78% Total Assets Turnover 1.52 2.31 Equity Multiplier 2.91 2.66 ROA 6.23% 8.74% ROE 18.11% 23.26% The Target Corporation has lower return on assets and return on equity as compared to its market leader the Wal-Mart, . despite of high profit margin. The high profit margin shows that the Target Corporation has controlled its expenses better than WMT, but has not utilized the assets as efficiently and effectively as the WMT has used. The company has assets turnover lower by around 0.79 therefore the return on assets is lower by around 2.51%. However, the equity multiplier of the company is better than market leader by around 0.25, but due to lower return on assets, the return on equity is also on lower side Part 2 TGT % WMT % Income Statement Common Size Analysis   in millions of $ 2-Feb-13 Total Revenue 73301 100.00% 469162 100.00% Cost of Revenue 50568 68.99% 352488 75.13% Gross Profit 22733 31.01% 116674 24.87% Operating Expense SG& A 15220 20.76% 88873 18.94% Others 2142 2.92% 0.00% Total Operating Expense 17362 23.69% 88873 18.94% Operating Income 5371 7.33% 27801 5.93% less interest expense 762 1.04% 2064 0.44% Earnings before taxes 4609 6.29% 25737 5.49% less taxes 1610 2.20% 7981 1.70% Net Income 2999 4.09% 17756 3.78% The common size analysis of two companies shows that the Target Corporation has the higher net profit margin as compared to its market leader. The main reason for difference in profit margin is the cost of revenues which is lower by around 6% for Target Corporation as compared to WMT, despite the higher operating expenses by around 5%. If Target could have controlled its operating expenses, the profit margin would be better than current margin of around 4%.

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