Given the following information: Percent of capital structure: Preferred stock 2
ID: 2621281 • Letter: G
Question
Given the following information: Percent of capital structure:
Preferred stock 20 %
Common equity 40
Debt 40
Additional information:
Corporate tax rate 34 %
Dividend, preferred $ 8.50
Dividend, expected common $ 2.50
Price, preferred $ 105.00
Growth rate 7 %
Bond yield 9.5 %
Flotation cost, preferred $ 3.60
Price, common $ 75.00
Calculate the weighted average cost of capital for Digital Processing Inc. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
Debt:
Perferred stock:
Common equity:
Weighted average cost of captial:
Explanation / Answer
After tax cost of debt = Yield [1-tax]
= 9.5[1-.34]
= 6.27%
cost of preferred stock = dividend /[price-flotation cost]
= 8.5/[105-3.6]
=8.5 /101.4
= .083826 or 8.3826%
cost of equity ={ dividend /[price-floatation cost]}+g
= {2.5 /[75-0] }+ .07
= .03333+.07
= .103333 or 10.3333%
weighted average cost of capital = 8.32%
cost weight weighted average cost Debt 6.27 .40 6.27*.4= 2.508 preferred stock 8.3826 .20 8.3826*.20= 1.67652 common equity 10.3333 .40 10.3333*.4= 4.13332 weighted average cost of capital 8.32%Related Questions
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