Given the following information: Percent of capital structure: Preferred stock 3

Question

Given the following information: Percent of capital structure: Preferred stock 30% Common equity 40 Debt 30 Additional information: Corporate tax rate 34 % Dividend, preferred $ 5.00 Dividend, expected common $ 1.50 Price, preferred $ 96.00 Growth rate 4 % Bond yield 11 % Flotation cost, preferred $ 9.50 Price, common $ 82.00 Calculate the weighted average cost of capital for Digital Processing Inc. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

a.Debt (Kd) %

b.Preferred stock (Kp)

c.Common equity (Ke)

d.Weighted average cost of capital (Ka) %

Explanation / Answer

Cost of Equity = (D1 / P0) + g where g: Growth rate, P0: current stock price and D1: Next year dividend (expected) Cost of Equity = ($1.5 / $82) + 4% = 5.83% Cost of Preference Share = Preference dividend / Price of preferred stock = $5 / $96 = 5.20% Cost of debt = Interest rate (Or Bond Yield) x (1 - tax rate) = 11% x (1 - 34%) = 7.26% WACC = [% of common equity x cost of equity] + [% of preferred stock x cost of preferred stock] + [% of debt x cost of debt] = [40% x 5.83%] + [30% x 5.20%] + [30% x 7.26%] = 0.02332+0.0156+0.02178 = 0.0607 or 6.07%

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