HBM has the following capital structure: Assets: $400,000 Debt: $140,000 PFD sto

Question

HBM has the following capital structure:

Assets:   $400,000

Debt: $140,000                PFD stock         $20,000       Common Stock: $240,000

The common stock is currently trading at $15.00 per share, pays a cash dividend of .75 cents per share and is growing annually at 6%. The PFD stock pays a $9.00 dividend and currently trades at $91.00 per share. The debt pays interest of 8.5% annually and the firm is in the 30% tax bracket.

What is the after tax cost of debt?

What is the cost of preferred stock?

What is the cost of common stock?

What is the WACC?

Explanation / Answer

Hi,

Please find the answer as follows:

Part 1:

After Tax Cost of Debt = Rate*(1-Tax Rate) = 8.5*(1-.30) = 5.95%

Part 2:

Cost of Preferred Stock = Annual Dividend/Current Selling Price*100 = 9/91*100 = 9.89%

Part 3:

Cost of Common Stock = Dividend/Current Selling Price + Growth Rate = .75*(1+.06)/15 +.06 = 11.30%

Part 4:

WACC = After Tax Cost of Debt*Weight of Debt + Cost of Preferred Stock*Weight of Preferred Stock + Cost of Equity*Weight of Equity = 5.95*140000/(140000 + 20000 + 240000) + 9.89*20000/(140000 + 20000 + 240000) + 11.30*240000/(140000 + 20000 + 240000) = 9.357% or 9.36%

Thanks.

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