The bonds your company just issued carry a yield to maturity of 9%, and you have

Question

The bonds your company just issued carry a yield to maturity of 9%, and you have preferred stock outstanding which pays a 7% dividend yield. Your company has a tax rate of 33%. Your company is capitalized with Equal Parts of Common Stock, Preferred Stock, and Debt. Your stock, which just yesterday (isn't that convenient...) paid a dividend of $2.00 per share, currently trades at $22 per share. The dividend is expected to grow at 5% per year, indefinitely. Q: What is your firm's marginal WACC today? Enter your answer as percentage. That is, ten percent would be "10" or "10.000" and NOT "10%" nor "0.10"

Explanation / Answer

Hi,

Please find the detailed answer as follows;

Cost of Equity = D1/Current Stock Price + Growth Rate = 2*(1+5%)/22 + .05 = 14.55%

Marginal WACC = Cost of Debt*(1-Tax Rate)*Weight of Debt + Cost of Preferred Stock*Weight of Preferred Stock + Cost of Equity*Weight of Equity = 9*(1-33%)*1/3 + 7*1/3 + 14.55*1/3 = 9.19% or 9.2%

Answer is 9.19% or 9.2%.

Thanks.

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