The Ulwind Company -a tax rate of 40% -a bond outstanding with a coupon of 9% an
ID: 2776273 • Letter: T
Question
The Ulwind Company
-a tax rate of 40%
-a bond outstanding with a coupon of 9% and a yield of 8%
-flotation cost of $2 on preferred stock and $2.50 on common stock
-common stock with a price of $52 per share
-Preferred stock with a price of $42 per share
-preferred dividends of $4
-this year common stock dividends, D, were $3.50
-Common dividends grow at a rate of 4% a year
At present Ulwind has capital consisting of: Bonds $1,500,000
Preferred Stock $2,500,000
Common Equity $8,000,000
calculate Ulwind’s MCC (marginal cost of capital) assuming that (1) it wants to maintain its current capital structure and (2) it will have to issue new shares of both preferred and common stock.
Explanation / Answer
Cost of debt = yield x (1- tax rate)
= 8% x(1-0.40)
= 4.80%
Cost of preferred stock = preferred dividend / (price – flotation cost)
= 4 / ( 42-2)
=10%
Cost of equity = Do x(1+g) /(P –F) +g
= 3.50x(1+0.04)/(52-2.5) + 0.04
=11.35%
Weight of asset = value of asset/ (total capital structure)
Weight of debt= 1,500,000/(1500000+2500000+8000000)
=0.125
Weight of preferred stock = 2500,000/(1500000+2500000+8000000)
=0.2083
Weight of equity= 8,000,000/(1500000+2500000+8000000)
= 0.6667
MCC = Wd x Kd + We x Ke + Wp x Kp
= 0.125x4.80% + 0.6667 x 11.35% + 0.2083 x 10%
= 10.25%
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