1. Based on the information below, calculate the weighted average cost of capita

Question

1.    Based on the information below, calculate the weighted average cost of capital.

Great Corporation has the following capital situation.
Debt: One thousand bonds were issued five years ago at a coupon rate of 8%. They had 25-year terms and $1,000 face values. They are now selling to yield 9%. The tax rate is 36%
Preferred stock: Two thousand shares of preferred are outstanding, each of which pays an annual dividend of $7.50. They originally sold to yield 15% of their $50 face value. They're now selling to yield 8%.
Equity: Great Corp has 125,000 shares of common stock outstanding, currently selling at $14.48 per share. Dividend expected for next year is $1.00 and the growth rate is 5%. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Explanation / Answer

Kd = 9*0.64 = 5.76%

Ke = 1/14.48 + 0.05 = 11.91%

Kp = 8%

We = 125000*14.48/2899270= 0.624

Wd = 1000*901.77/2899270 = 0.311

Wp = 2000*93.75/2899270 = 0.065

WACC = 11.91*0.624 + 5.76*0.311 + 8*0.065 = 9.74% approx

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