The cost of capital-weighted average cost of capital

Assignment Help Financial Management

Reference no: EM131622254

The Cost of Capital: Weighted Average Cost of Capital

The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings is used in the firm's WACC calculation. However, if the firm will have to issue new common stock, the cost of new common stock should be used in the firm's WACC calculation.

Quantitative Problem: Barton Industries expects that its target capital structure for raising funds in the future for its capital budget will consist of 40% debt, 5% preferred stock, and 55% common equity. Note that the firm's marginal tax rate is 40%. Assume that the firm's cost of debt, rd, is 8.4%, the firm's cost of preferred stock, rp, is 7.9% and the firm's cost of equity is 12.4% for old equity, rs, and 12.71% for new equity, re. What is the firm's weighted average cost of capital (WACC1) if it uses retained earnings as its source of common equity? Round your answer to 3 decimal places. Do not round intermadiate calculations.

What is the firm’s weighted average cost of capital (WACC2) if it has to issue new common stock? Round your answer to 3 decimal places. Do not round intermadiate calculations.

Reference no: EM131622254

Questions Cloud

Examine the laboratory blood test results : Explain what Mucor is and how a patient is likely to become infected with Mucor.Examine the laboratory blood test results.

Employees with their career development : Propose three ways that a mentor and a new employee orientation can assist employees with their career development.

Compute the efficiency variances for direct labor : Suppose you manage the local Scoopy's ice cream parlor. Compute the efficiency variances for direct labor and direct materials

Prescribed for performance consulting : In "The Anatomy of Performance," written by Geary Rummler (Handbook of HPT, chapter 42), four critical success factors were prescribed for performance.

The cost of capital-weighted average cost of capital : The firm's target capital structure is mix of debt, preferred stock. What is firm’s weighted average cost of capital if it has to issue new common stock?

Prepare the journal entry to account for the impairment loss : Prepare the journal entry to account for the impairment loss at 30 June 2017 according to the requirements of AASB 136 Impairment of Assets

Summarize key scientific data that supports global warming : Summarize the Key Scientific Data That Supports Global Warming. Describe the Chemical Composition of the Atmosphere and How it is Affected by Life.

What do you think about elizabeth diligence : Audit Overtime. The performance evaluation of all accountants is based in part on their ability to do audit work efficiently and within the time budget planned.

Discuss labor policy and globalization : Research and development policy and globalization, Labor policy and globalization

User Account

All Pages