Duster Inc the following capital structure: Debt $ 900,000 Preferred Stock $ 100

Question

Duster Inc the following capital structure: Debt $ 900,000 Preferred Stock $ 100,000 Common Stock $ 1,000,000 Total Assets = $ 2,000,000 a) Determine the weight of each capital component. b) If the interest rate on the debt before tax adjustment is 8% and the tax rate is 40% determine the cost of debt. Preferred dividends are $ 2.00 per share and preferred stock market price is $ 25. Determine the cost of preferred stock. c) The common stock dividend is paying $ 3.00 and the price of the common is $ 20 with a growth rate of 5%. Determine the cost of common stock. d) Using the figures you have calculated determine Duster Inc weighted average cost of capital. (WACC)

Explanation / Answer

Weight of Debt = 900000/2000000 i.e 0.45 or 45%

Weight of Preferred stock = 100000/2000000 i.e 0.05 or 5%

Weight of common stock = 1000000/2000000 i.e 0.50 or 50%

Cost of debt = Interest ( 1- Tax )

= 8% ( 1-0.40) i.e 4.80%

Cost of preferred stock = Preference Dividend / Price

= 2/25 i.e 8%

ost of common stock = 3(1.05)/20 i.e 15.75%

WACC = 4.80*0.45+8*0.05+15.75*0.50

= 10.435%

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