Burton Company wants to calculate the component cost in its capital structure. C
ID: 2658951 • Letter: B
Question
Burton Company wants to calculate the component cost in its capital structure. Common stock currently sells for $33, and is expected to pay a dividend of $.40. Burton's dividend of $3.00, and carries a flotation cost of $1.10. Burton's Company bonds yield 7% in the market. Burton's is in the 30% tax bracket.
a. Calculate cost of debt, cost of new common new stock, cost of preferred stock and cost of retained earnings.
b. Calculate the company's weighted average cost of capital assuming that its new financing will consist of 40% debt, 10% preferred stock, and 50% retained earnings.
Explanation / Answer
The cost of various capital can be computed as follows
Cost of debt shall be=Rate of interest(1-Tax rate)
=7%(1-0.30)
=4.9%
Cost of common stock shall be computed using the formula=
D1/Current price
=0.4/33
=1.21%
Cost of preference stock shall be calculated as below
dividend/(100-Floatation cost)[we are assuming the preference stock value to be 100 as no value is given]
=3/(100-1.1)
=3.03%
B)
Now the company's WACC shall be calculated as
=(Cost of debt*Proportion in total capital)+(Cost of preference stock*Proportion in total capital)+(Cost of common stock*Proportion in total capital)
=(4.9%*40%)+(3.03%*10%)+(1.21%*50%)
=2.868%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.