hi there, I have a finance homework and could not figure out how to solve it I n

Question

hi there,

I have a finance homework and could not figure out how to solve it I need help. please provide a little explanation of the work so I can understand

Information follows: Find individual component costs of capital then overall weighted avg. cost Ideal Capital Structure: 30% Debt, 10% Preferred Stock. 60 % Equity (retained earnings and common stock) Tax rate: 35% Equity: rmkt = 14.3% rrf = 4.3% Beta = 1.2 Expected growth rate = 6% Common Stock price = $35 Historical risk premium of equity over long term debt = 6.5% Next dividend = $3.50 per share Debt: 9% coupon, 25 years, annual payments, current price = $909,225 Preferred: Annual dividend = $2.40, current price = $22.23, 10% flotation cost

Explanation / Answer

Cost of capital of Preferred Stock = Dividend on preferred Stock /price of Preferred Stock/(1-floatation cost)

rp = 2.40/22.23/(1-0.10) = 12%

Cost of Equity = rf +(rm- rf) x beta

Cost of Equity = 4.3%+(14.3%-4.3%) x 1.2

Cost of Equity = 4.42%

Cost of Debt = Coupon RAte(1-tax rate)

Cost of debt = 0.09(1-0.35) = 5.85

WACC = rate of preferred stock x weight of preferred stock +rate of equiyx weight of equiy+rate of debt x weight of debt

WACC = 0.12x 0.10 +0.0442x 0.60+0.0585x 0.30 = 0.03220 or 32.20%

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