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 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%.

Explanation / Answer

Answer:

Price=80*PVIFA(9%,20)+$1000*PVIF(9%,20)

=908.71

Market value of Debt=908.71*1000=908710

Preferred shares=2000*93.75=187500

Kp=8%

Mp=7.5/0.08=93.75

Equity=125000*14.48=1810000

Ke=1/14.48+0.05

=11.90%

WACC:

Particulars Market value Weight Cost WACC Debt 908710 0.312678712 5.76% 1.80% Preferred 187500 0.064517017 8% 0.52% Equity 1810000 0.622804271 11.90% 7.41% Total 2906210 9.73%

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