National Products Inc. wants to calculate its weighted average cost of capital (
ID: 2766672 • Letter: N
Question
National Products Inc. wants to calculate its weighted average cost of capital (WACC). The company’s CFO has collected the following information:
The company has a long-term bond outstanding, valued at $20 million. The bond is a semiannual coupon bond with 6% coupon rate, and 5 years left to maturity. The current price is $959.45 for $1,000 par value.
The company’s preferred stock pays a fixed dividend of $2 per share, and the preferred stock price is $20.
The company’s common stock price is $32 a share, and recently paid a dividend of $2 a share.
The dividend is expected to grow at a constant rate of 6% per year.
The company has the target capital structure of $50 million in equity, $10 million in preferred stock and $20 million in debt.
The company’s tax rate is 40%.
What is the company’s before-tax cost of debt?
What is the company’s cost of preferred stock?
What is the company’s cost of common stock?
What is the company’s weighted average cost of capital?
Explanation / Answer
Cost of Issuing New stock would be equal to the cost of equity to the company
Cost of Equity = D1/ P +g
D1 = Dividend in next year
=2*1.06 =2.12
P= $32
G=6%
=2.12/32 +6%
=12.625%
Cocts of preferd stock =dividend /price =2/20=10%
Ccost of debt
Yield to maturity of bons
N=10 semi annual period
Current price =959.45
Coupon =$ 30 annuak
RATE(10,-30,959.45,-1000,0,0)= 3.49%
Annual yield =2*3.49% =6.97%
Before tax cost of capital =6.97%
hence after tax cost of capital = yield*(1-t)
t= tax rate = 4.18%
Total cost of capital
=50/80*12.625% +10/80*10% + 20/80*4.18% =10.18%
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