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Compute the individual cost of capital

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Question - UC's target capital structure is 40 percent debt, 50 percent common stock and 10 percent preferred stock. Information regarding the company's cost of capital can be summarized as follows:

The company's bonds have a nominal yield to maturity of 7 percent.

The company's preferred stock sells for $42 a share and pays an annual dividend of $4 a share.

The company's common stock sells for $23 a share and is expected to pay a dividend of $2 a share at the end of the year (i.e. D1 = $2.00). The dividend is expected to grow at a constant rate of 7 percent a year.

The firm will be able to use retained earnings to fund the equity portion of its capital budget.

The company's tax rate is 40 percent.

Required -

1. Compute the individual cost of capital.

2. Compute the company's weighted average cost of capital (WACC)?

Reference no: EM133064659

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