S. Company has the following captial structure: 45% debt, 15% preferred stock an
ID: 2652109 • Letter: S
Question
S. Company has the following captial structure: 45% debt, 15% preferred stock and 40% common stock. Assume the risk-free rate is 8%, the beta stock is 1.3 and the market risk premium (Rm - Rf) is 12%, Determine the weighted average costs of capital (WACC) if you take the average if the CAPM abd dividend growth models to estimate the cost of equity.
- the firms 10-year 7% annual coupon bond is currently trading at $717.49.
- the firms 10% annual dividend perpetual preferred stock with a par value of $100 is trading at $71.43
- the common stock is trading at $150. Their next dividend is expected to be $5.00. The growth rate is forcasted at 10%.
Explanation / Answer
Statement showing computationof WACC Particulars Weight Cost of Capital Weighted Cost of capital Equity or common stock 0.4000 18.465% 7.39% Preferred Stock 0.1500 14.00% 2.10% Debt 0.4500 9.76% 4.39% 1.0000 13.88% CAPM ke= Rf + Beta(MRP) ke = 8% + 1.3(12%) ke = 8% + 15.60% ke = 23.60% Dividend Growth ke = D1/Po + G ke= 5/150 + 10% ke= 13.33% Ke = (23.60% + 13.33%)/2 Ke = 18.465% Kp = Dividend / Price Kp = 10/71.43 kp = 14% Kd = intt/price Kd = 70/717.49 Kd = 9.76%
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