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

Question

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 10%. They had 25-year terms and $1,000 face values. They are now selling to yield 9%. The tax rate is 40%
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 10%.
Equity: Great Corp has 120,000 shares of common stock outstanding, currently selling at $14.48 per share. The risk free rate is 3%, market rate of return is 10% and the Beta is 1.2.

Explanation / Answer

Year interest present value @9% present value of cash inflow 1 100 0.9174312 91.74312 2 100 0.84168 84.168 3 100 0.7721835 77.21835 4 100 0.7084252 70.84252 5 100 0.6499314 64.99314 6 100 0.5962673 59.62673 7 100 0.5470342 54.70342 8 100 0.5018663 50.18663 value of preference share preference dividend/yield 50 9 100 0.4604278 46.04278 market value of preference share 75 10 100 0.4224108 42.24108 11 100 0.3875329 38.75329 cost of preference shares preference dividend/market value of preference share 0.1 10 percent 12 100 0.3555347 35.55347 13 100 0.3261786 32.61786 cost of equity share IRF+(Rm-IRF)*beta 8.43 8.43 percent 14 100 0.2992465 29.92465 15 100 0.274538 27.4538 capital structure weight cost 16 100 0.2518698 25.18698 debt 1098226 0.367813 5.4633574 2.009494 17 100 0.2310732 23.10732 preference 150000 0.050237 10 0.502374 18 100 0.2119937 21.19937 equity 1737600 0.58195 8.43 4.905835 19 100 0.1944897 19.44897 2985826 weighted average cost of capital 7.417703 percent 20 100 0.1784309 17.84309 21 100 0.1636981 16.36981 22 100 0.1501817 15.01817 23 100 0.1377814 13.77814 24 100 0.1264049 12.64049 25 1100 0.1159678 127.5646 value of bond 1098.226 cost of debt (interest/market price)*(1-t) 0.054634 5.463357 percent

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