Fabritech Corporation plans to raise 30,000,000 worth of capital to fund a new p
ID: 2761169 • Letter: F
Question
Fabritech Corporation plans to raise 30,000,000 worth of capital to fund a new project. It raises money through the methods below. What is the Weighted Average Cost of Capital? Source Funding Cost of Funding Bank Loan 10,000,000 18% per year payable monthly Preferred Stock 5,000,000 dividend 1.00 per share paid annually, price per share 30.00 cost of selling share 0.25. Bonds 5,000,000 6% per year paid semi-annually Retained Earnings 10,000,000 dividend 1.00 per share the Common stock price is 30.00 dividend paid annually Ignore growth considerations. Income tax rate is 40%Explanation / Answer
Answer:
Cost of bank loan after tax=18%(1.0.40)=10.80%
Preferred stock=$1/(30-0.25)=3.36%
Cost of bonds after tax=6%*(1-0.40)=3.6%
cost of retained earnings=$1/30=3.33%
Capital structure Market value Weight Cost of capital WACC Bank loans 10000000 0.333333333 10.80% 3.60% Preferred stock 5000000 0.166666667 3.36% 0.56% Bonds 5000000 0.166666667 3.60% 0.60% Retained earnings 10000000 0.333333333 3.33% 1.11% Total 30000000 5.87%Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.