Compute the weighted average cost of capital

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ABC’s common stocks are currently selling for $25 per share. Its stock beta is 1.5 and there are 500,000 shares of common stocks outstanding. ABC’s 6% semiannual coupon bonds with 8 years to maturity are currently selling at 110 percent of their face value, $1,000. There are 10,000 bonds outstanding. ABC’s preferred stocks pay a $3 annual dividend and are currently selling for $30 per share. There are 100,000 shares of preferred stocks outstanding. Assume that the risk-free rate is 4%, and the expected market return is 12%. (a) Compute the capital structure weights (common stock weight (wc), debt weigh (wd), and preferred stock weight (wp)). (b) Compute the cost of common equity (Rc). (Hint: Use the CAPM) (c) Compute the before-tax cost of debt (Rd). (Hint: Find the YTM) (d) Compute the after-tax cost of debt. (e) Compute the cost of preferred stock (Rp). (f) Compute the weighted average cost of capital (WACC). (Refer to Ch13 teaching note pages 33 – 50)

Reference no: EM131498793

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