The balance sheet that follows indicates the capital structure for Nealon Inc. F

Question

The balance sheet that follows indicates the capital structure for Nealon Inc. Flotation costs are (a) 15 percent of market value for a new bond issue, and (b) $2.01 per share for preferred stock. The dividends for common stock were $2.50 last year and are projected to have an annual growth rate of 6 percent. The firm is in a 34 percent tax bracket. What is the weighted average cost of capital if the firm

Explanation / Answer

LET COST OF BONDS BE Kd. So, 1035 = ((1000*0.08)*((1+Kd)^16-1)/(Kd(1+Kd)^16)) +1000/(1+Kd)^16 => Kd = 0.08 = 8% Cost of preferred stock, Kp = D1/P = 1.50/19 = 0.079 = 7.9% Cost of common equity = 0 as no dividends are indicated. WACC = We*Ke + Wp*Kp + Wd*Kd => = 0 + 0.15*7.9+ 0.38*8 => = 4.225 % = say 4.23% (ANSWER)

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