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Find the cost of each financing source

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Reference no: EM132854314

Question - Your task is to find the cost of capital (WACC) for a company. The company has three sources of capital available. The marginal tax rate for the company is 35%.

Common stock: 100 000 shares outstanding with the book value of $20 but currently trading at P/B=2.0. One may apply CAPM to estimate the cost of equity. Inputs for estimations are: risk free rate 2.8%, market risk premium 10.0% and the stock beta is 1.20.

Debt: 2 000 discount bonds with $1 000 par value, with 4 year to maturity. Bonds currently offer 6% yield to bondholders.

Preferred stock: 14 000 shares outstanding with $90 market price and 7% yield.

Required - Find the cost of each financing source, capital structure weights for each source and finally WACC.

Reference no: EM132854314

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