Based on the information below, calculate the weighted average cost of capital.
ID: 2612691 • Letter: B
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 11%. They had 20-year terms and $1,000 face values. They are now selling to yield 9%. The tax rate is 37% 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 11%. Equity: Great Corp has 108,000 shares of common stock outstanding, currently selling at $18.48 per share. Use the risk premium approach and assume a 3% risk premium 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 11%. They had 20-year terms and $1,000 face values. They are now selling to yield 9%. The tax rate is 37% 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 11%. Equity: Great Corp has 108,000 shares of common stock outstanding, currently selling at $18.48 per share. Use the risk premium approach and assume a 3% risk premiumExplanation / Answer
Cost of Debt can be taken yield value of 9%. (Yield value is more important than coupon rate).
Preferred Stock- cost can be taken as 7.5% (i.e., 15% of $ 50).
Cost of Equity = Risk Premium+ Risk Free Return (As Risk Free return not available in question, Risk Free return can be taken as cost of debt ) 9%+3% = 12%
Dear Friend,Cost of Debt can be taken yield value of 9%. (Yield value is more important than coupon rate).
Preferred Stock- cost can be taken as 7.5% (i.e., 15% of $ 50).
Cost of Equity = Risk Premium+ Risk Free Return (As Risk Free return not available in question, Risk Free return can be taken as cost of debt ) 9%+3% = 12%
Source of Capital Value Capital Structure Cost of Capital Tax Saving Effective COST of Capital WACC 1 2 3 (2/ total of 2) 4 5 6 = 4*(1-5) 7 (6*3) DEBT 1000000 32% 9 37% 5.67 1.83149 PREFERRED STOCK 100000 3% 15 0 15 0.484521 COST OF EQUITY 1995840 64% 12 0 12 7.736214 3095840 WACC 10.05222Related Questions
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