According to the balance sheet, if the preferred stock pays a dividend of $2 per
ID: 2675517 • Letter: A
Question
According to the balance sheet, if the preferred stock pays a dividend of $2 per share, the beta of the common tsock is .8, the market risk premium is 10%, the risk free rate is 6%, and the firm's tax rate is 40%, what is University's weighted-average cost of capital?
Assets
Cash and short term securites = $1
Accounts receivable= $3
Inventories= $7
Plant and equipment= $21
Total = $32
Liabilties and net worth
Bonds, coupon= 8%, paid annually (maturity =10 yrs, current YTM= 9%) = $10.0
Preferred stock (par value $20 per share) = $2.0 $
Common stock (par value $.10) = .1
Additional paid-in stockholders capital = 9.9
Retained earnings = 10.0
Total = $32.0
Pleas show work, Thank you!
Explanation / Answer
cost of equity = risk free rate + beta*market risk premium
= 6% + 0.8*10%
= 14%
WACC= (% of common stock * cost of equity) + (%preferred stock * dividend/price of preferred stock) + (%debt * cost of debt * (1-tax rate))
please substitute values to get answer!
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