Given the following information: Percent of capital structure: 30% Preferred sto

Question

Given the following information: Percent of capital structure: 30% Preferred stock Common equity Additional information: Bond coupon rate Bond yield to maturity Dividend, expected common Dividend, preferred Price, common Price, preferred Flotation cost, preferred Growth rate Corporate tax rate 18% 14% $7.00 $ 14.00 $70.00 $124.00 $ 5.80 10% Calculate the Hamilton Corp.'s weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places Weighted Cost Preferred stock Common equity Weighted average cost of capital 0.00%

Explanation / Answer

Weighted Cost Debt 2.73% Preferred Stock 1.78% Common Equity 11.00% Weighted Average cost of Capital 15.51% Working: a. Debt Bonds Yield to Maturity 14% Before Tax cost of debt 14% After Tax cost of debt = Before Tax cost of debt *(1-Tax Rate) = 14%*(1-0.35) = 9.10% Weight of debt = 30% Weighted Cost of debt = After tax cost of deb x weight of debt = 9.10% x 30% = 2.73% b. Prefered Stock: Cost of Preferred Stock = Dividend of Preferred Stock / Net Proceeds of Preferred Stock =                                   14.00 /      118.20 = 11.84% Net Proceeds of Peferred Stock = Selling Price of bond-Flotation cost =                                 124.00 -           5.80 =                                 118.20 Weighted cost of preferred stock = Cost of preferred Stock x Weight of preferred stock = 11.84% x 15% = 1.78% c. Common Equity: Cost of common Equity = (D1/P0)+g Where, = (7/70)+0.10 D1 Expected Dividend = 20.00% P0 Current Price g Growth rate Weighted Cost of Common Equity = Cost of Common Equity x Weight of Common Equity = 20.00% x 55% = 11.00%

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