Reference no: EM132157953
Consider the following components of the firm's balance sheet:
Debt..................$25,000
Common Equity....$95,000
Preferred Equity....$35,000
Total assets equal $155,000. The preferred stock is currently selling at $35 and receives an annual dividend of $4.00. Currently, the common stock is trading at $67.75. The last dividend paid was $3.25, which was up $.25 from the prior year. The bonds for the firm are trading at 95% of par and pay a semi-annual coupon of 7.5%. The tax rate is 38%.
2. What is the WACC for the firm?
Weights:
Debt = 25/155 = .1613, Equity (common) = 95/155 = .6129, Pref. = 35/155 = .2258
Costs: (Div per Share (for next year) / mkt val of stock) + growth % of div
Debt: 8.24% Common: 13.53% Pref.: 11.43%
1 - Tax Rate = .62
WACC = .1613 (.0824)(.62) + .6129 (.1353) + .2258 (.1143) = 11.69%
How exactly are the costs calculated in this situation? Please break this down.