The Killington Corporation has planned capital expenditures of $40 million for t

Question

The Killington Corporation has planned capital expenditures of $40 million for the upcoming fiscal year.

Killington's stock is currently selling at $20 per share. Flotation costs are 10%. The earnings growth rate

has been steady and is expected to continue. The last dividend paid was $0.91 per share and is expected

to grow at a rate of 10%. The company tax rate is 40%. The Mortgage bonds are currently selling for

$1,113. The bonds are 11%, $1,000 par and pay interest annually. They will mature in 10 years.

ALL FORMULAS CAN BE FOUND IN CHAPTER 10 SLIDES OR WACC EXAMPLE

Compute the after-tax cost of each component of capital.

a) 11% Bonds

b) Retained Earnings

c) New Common Stock

Explanation / Answer

a) 11% Bonds

Let before-tax cost of debt = rd

1,113 = 110/(1+rd) + 110/(1+rd)^2 + 110/(1+rd)^3 ....1110/(1+rd)^10

rd = 9.22%

before-tax cost of debt = 9.22%*(1-40%) =5.53%

b)20*(1-10%)=0.91*1.1/(re-10%)

re =15.56%

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