A. Fuhs Pastries, Inc has 12% annual coupon bonds outstanding with 11 years rema

Question

A. Fuhs Pastries, Inc has 12% annual coupon bonds outstanding with 11 years remaining until maturity. The current price fo the bonds are $1,329. What is Fuhs' cost of debt?

B. Paccione Italian Grill, Inc. has 6 million shares of common stock outsanding that is currently trading at $66 per share. The firm recently paid a $4.50 dividened and dividends are expected to increase by 6 percent per year indefinitely. Paccione also has 750,000 preferred shares outstanding that pay a $4.50 annual dividend and have a current price of $80.00 per share. The firm also has 130,000 bonds outsatanding that pay a 9% annual coupon and have 18 years remaining until maturity. The bonds currently sell for $725. Paccione is subject to a 30% marginal tax rate.

What is Paccione's Weighted Average Cost of Capital?

Explanation / Answer

12 %

B.

Weighted average cost of capital =Cost of equity * Proportion of equity in total capital + Cost of debt * Proportion of debt in total capital

Cost of common equity =Dividend amount paid next year/Stock market price + dividend growth rate

   =4.77/66 +0.06

.1322

Cost of preference equity =dividend amount/current price =4.5/80=0.05625

Cost of debt = Cost of debt before tax (1-Marginal tax rate)

= 9 %(1-30%)

=6.3 %

Capital =Common equity share capital + Preference share capital + Bond

=6000000 + 750000 + 130000 =6880000

Weighted average cost of capital = 6000000/6880000 * 0.1322

Answer =12.26 %

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