Given the following information, calculate the weighted average cost of capital

Question

Given the following information, calculate the weighted average cost of capital for Digital Processing Inc. Line up the calculations in the order shown in Table 11-1.

Percent of capital structure:

Preferred stock................       20%

Common equity...............       40

Debt.................................       40

Additional information:

Corporate tax rate.............................          34%

Dividend, preferred...........................       $8.50

Dividend, expected common.............        $2.50

Dividend, preferred...........................    $105.00

Growth rate.......................................            7%

Bond yield..........................................          9.5

Flotation cost, preferred....................        $3.60

Price, common...................................      $75.00

Explanation / Answer

Cost of Equity = Dividend/current price+growth rate 2.5/75+7% = 10.33% Cost of Preferred = Dividend/current price+growth rate 8.5/105+7% = 15.10% Cost of Debt 9.5%*(1-.34) 6.27% source weight Cost weight*cost Equity 0.4 10.33% 4.13% Preferred 0.2 15.10% 3.02% Debt 0.4 6.27% 2.51% WACC 9.66%

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