Reference no: EM132964517
Question - SuperStore has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital.
Long Term Debt = $3,000,000
Preferred Stock = $1,200,000
Common Stock = $3,300,000
Firms average tax rate is 30%, marginal rate is 34%
Debt The firm can sell for $980 a 5-year, $1,000-par-value bond paying annual interest at a 8% coupon rate. A flotation cost of 9.5% of the par value is required in addition to the discount of $15 per bond.
Preferred stock 7.85 percent (annual dividend) preferred stock having a par value of $100 can be sold for $79.50. An additional fee of $2.80 per share must be paid to the underwriters.
Common stock The firm's common stock is currently selling for $68 per share. The dividend expected to be paid at the end of the coming year is $3.70. Its dividend payments, which have been approximately 60% of earnings per share in each of the past 6 years, were as shown in the following table.
Year Dividend
2013 $3.48
2012 $3.25
2011 $3.06
2010 $2.98
2009 $2.74
2008 $2.57
It is expected that to attract buyers, new common stock must be underpriced $6.50 per share, and the firm must also pay $4.10 per share in flotation costs. Dividend payments are expected to continue at 60% of earnings. (Assume that Rr=Rs.)
Required -
1. Calculate the before tax cost of debt using Time Value of Money.
2. Calculate the before tax cost of debt using Approximation.
3. Calculate the after-tax cost of debt with Time Value of Money value.
4. Calculate the cost of preferred stock.
5. Calculate the cost of retained earnings.
6. Calculate the new cost of common stock.
7. Calculate the WACC for Super Store.
8. Should SuperStore accept with the cost of Capital of 10%?
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