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Problem I:
Use the following information to find the weighted average cost of capital.
Perry Corporation can issue bonds at a market rate of interest of 10%. The tax rate for Perry is 40%. Preferred stock with annual dividends of $10 can be issued for $100. Common stock with dividends in year one of $2 can be issued for $20. Common stock dividends are expected to grow at a 7% rate.
Following is the capital structure for Perry:
Book Value Market Value
Debt 400 300
Preferred Stock 200 200
Common Equity 400 1,500
Using market values to determine the weight of each source of financing determine the weighted average cost of capital for Perry Corporation.
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