Falcon Ridge Developers wants to compute the firm’s WACC for capital budgeting p
ID: 2449785 • Letter: F
Question
Falcon Ridge Developers wants to compute the firm’s WACC for capital budgeting purposes. The firm uses 30% debt, 30% preferred stock and the remainder is in equity. The YTM on the firm’s debt is currently 4.5% and the firm’s marginal tax rate is 40%. They pay a dividend of $3 on their preferred stock and the current price of the preferred stock is $75. Falcon’s most recent common dividend was $5, but has been growing at a rate of 8% per year and is expected to continue that trend. The common stock is currently selling for $50. Calculate the firm’s WACC.
Explanation / Answer
After Tax cost of debt = YTM( -Tax)
= 4.5 (1 - .40)
= 4.5 *.60
= 2.7%
Cost of preferred stock = Dividend /current price
= 3 /75
= .04 or 4%
Cost of equity =[ D0(1+g) /current price] +g
= [5 (1+.08) / 50] + .08
= [5 *1.08/50 ]+.08
= 5.4/50 +.08
= .108+.08
= .188 or 18.80%
WACC =(After tax cost of debt *WD) +(cost of preferred stock *Wp)+(cost of equity *We)
= (2.7 * .30)+(4*.30)+(18.80*.40)
= .81 + 1.2 + 7.52
= 9.53%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.