Reference no: EM132959778

Heavy Duty Zippers, Inc. (HDZ), a manufacturer of girdles and other fine intimate apparel products, wants to determine its WACC today 6/15/2021. The firm issued 5000 bonds that mature in 6/15/2041 with $1,000 face value. These bonds pay an 8% coupon rate semiannually and are currently selling for $908. The firm has 50K preferred shares of stock outstanding with a book value of $30, but currently selling for $40 per share. The last preferred and common dividend payments were $3 and $1.5 per share respectively. The firm's EPS five years ago was $4.00 and the firm expects to increase its next dividend payment by the implied 5-year EPS growth rate. Flotation costs on debt and preferred equity (D&P) are both 1%, but 5% of the selling price in the case of common stocks. The common stock is selling today for $35 and the firm's tax rate and payout ratio are 35% and 30% respectively. The firm has 80K shares of common stock outstanding with the same book value as that of its preferred stock.

Problem a) Use Excel to calculate the book value and market value weights for each source of capital.

Problem b) Calculate the component costs of capital (Including flotation costs) for common equity, preferred equity, and debt.

Problem c) Determine the weighted average costs of capital using both the market and the book value weights.