Calculate the weighted cost of each source of capital

Assignment Help Financial Management

Reference no: EM131896605

Brook’s Window Shields Inc. is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Glass, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital.

The company currently has outstanding a bond with a 10.0 percent coupon rate and another bond with a 7.0 percent coupon rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.0 percent.

The common stock has a price of $96 and an expected dividend (D1) of $4.40 per share. The firm's historical growth rate of earnings and dividends per share has been 12.0 percent, but security analysts on Wall Street expect this growth to slow to 11 percent in future years.

The preferred stock is selling at $92 per share and carries a dividend of $6.60 per share. The corporate tax rate is 40 percent. The flotation cost is 2.2 percent of the selling price for preferred stock. The optimal capital structure is 35 percent debt, 20 percent preferred stock, and 45 percent common equity in the form of retained earnings.

a. Compute the cost of capital for the individual components in the capital structure. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

Weighted Cost

Common equity- %

b. Calculate the weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

Weighted Cost

Common equity- %

Reference no: EM131896605

Questions Cloud

Should the borrower refinance : Should the borrower refinance? Should the borrower refinance if s/he expects to remain in the home only 5 years?

Calculate the payback period for project : Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Calculate the payback period for this project.

Jasper metals is considering installing new molding machine : Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $73,000 a year for 7 years.

What is firm-specific variance of your portfolio : What is the firm-specific variance of your portfolio? What is the covariance between the portfolio and the market index?

Calculate the weighted cost of each source of capital : Calculate the weighted cost of each source of capital and the weighted average cost of capital.

Nonconstant growth valuation-what is the firm horizon : Nonconstant growth valuation-What is the firm's horizon, or continuing, value?

Market believe will be the stock price at end of three years : Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years?

Internal rate of return of the before-tax levered cash flow : What is the internal rate of return of the before-tax levered cash flows if you still assume a five-year holding period?

Repayment into the income statement and cash flow statement : Calculate the effects of borrowing and include the debt interest paid and the principal repayment into the income statement and cash flow statement.

User Account

All Pages