. (TCO 4) Given the following information, calculate the weighted average cost f

Question

. (TCO 4) Given the following information, calculate the weighted average cost for the Han Corp.
Percent of capital structure:
Preferred stock                                                      15%
Common equity                                                     60%
Debt                                                                      25%

Additional information:
Corporate tax rate                                                  34%
Dividend, preferred                                                $9.50
Dividend, expected common                                  $1.50
Price, preferred                                                      $100.00
Growth rate                                                            9%
Bond yield                                                             6%
Price, common                                                               $75.00 (Points : 40)

Explanation / Answer

Cost of Equity = (D1 / P0) + g

where

g: Growth rate,

P0: current stock price and

D1: Next year dividend (expected)

So. Cost of Equity = ($1.5 / $75) + 9% = 11%

Cost of Preference Share = Preference dividend / Price of preferred stock = $9.5 / $100 = 9.5%

Cost of debt = Interest rate (Or Bond Yield) x (1 - tax rate) = 6% x (1 - 34%) = 3.96%

WACC = [% of common equity x cost of equity] + [% of preferred stock x cost of preferred stock] + [% of debt x cost of debt]

= [60% x 11%] + [15% x 9.5%] + [25% x 3.96%] = 6.6% + 1.43% + 0.99% = 9.02%

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.