Given the following information: Percent of capital structure: Preferred stock 2
ID: 2824980 • Letter: G
Question
Given the following information:
Percent of capital structure:
Preferred stock 20 %
Common equity 40
Debt 40
Additional information:
Corporate tax rate 34 %
Dividend, preferred $ 8.50
Dividend, expected common $ 2.50
Price, preferred $ 105.00
Growth rate 7 %
Bond yield 9.5 %
Flotation cost, preferred $ 3.60
Price, common $ 75.00
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.)
Debit: _____%
Perferred Stock:____
Common Equity:_____
Weighted Average Cost of Capital:______%
Explanation / Answer
Cost of debt = Yield x (1-Tax) = 9.5%*(1-34%) = 6.27%
.
Cost of preference = Dividend / (Price-Flotation cost) = 8.5/(105-3.60) = 8.38%
.
Cost of equity = (Dividend*(1+Growth rate) / Price of equity) + Growth rate
= (2.5*(1+7%)/75)+7%
= 10.57%
Particulars
Weight
Cost
Preferred Share
20.00%
8.38%
Equity
40.00%
10.57%
Debt
20.00%
6.27%
WACC = Cost of preferred x Weight of preferred + Cost of equity x Weight of equity + Cost of debt x Weight of debt
WACC = 20%*8.38% + 40%*10.57% + 20%*6.27%
WACC = 7.16%
Particulars
Weight
Cost
Preferred Share
20.00%
8.38%
Equity
40.00%
10.57%
Debt
20.00%
6.27%
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