wacc & jacob

xlsx

School

Seneca College *

*We aren’t endorsed by this school

Course

750

Subject

Finance

Date

Jan 9, 2024

Type

xlsx

Pages

Uploaded by MasterClover12811

Given: weight of common stock wcs =40% weight of preferred stock wps =10% weight of debt wd = 50% Cost of common equity kcs =18% Cost of preferred stock kps =10% Cost of debt kd= 8% T=35% WACC = [(weight of debt*(1-Tax rate)*Cost of Debt) + (weight of preferred stock * cost of preferred stock) + (w WACC = 10.8 Jacob industries WACC is calculated as 10.8%, which lies between the lowest source of capital (cost of debt 8% . The target capital structure for Jacob Industries is 40% common stock, 10% preferred stock, and 50% debt. If the cost of common equity for the firm is 18%, the cost of preferred stock is 10%, the before-tax cost of debt is 8% and the firm’s tax rate is 35%, what is Jacob’s weighted average cost of capital? (5 points)

0.4 1 0.1 2 0.5 3 weight of common stock * cost of common stock) %) and median which is (cost of common equity + cost of debt)/2 ) 13% which is a good sign because WACC is 1 2 3

much closer to cost of debt

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b). You are working as a conusltant on a new project for John Deere Co. Ltd. and have been asked to compute the firm's weighted average cost o The facts for each source of capital are as follows: Bonds: Preferred Stock: Common Stock: (Hint 1: The YTM is used to calculate the cost of debt, not the coupon rate. Hint 2: You must first find the Dividends in Year 1 inorder to determine WACC = [(Kd*(1-T)*Wd) + (Kps *Wps) + (Kcs*Wcs)] Source of Capital Market Value Bonds (Debt) $300,000 Preferred Stock $200,000 Common Stock $500,000 Total $1,000,000 Bonds Face or Par Value of Bond $100,000 Coupon Rate 6% Price or Market Value of Bond $1,020 Number of years 20 Preferred Stock Dividend of Preferred Stock Market Price of Preferred Stock Source of Capital Market Value Bonds (Debt) $300,000 Preferred Stock $200,000 Common Stock $500,000 Total $1,000,000 Face or Par Value of Bond $1,000 Coupon Rate 6% (Paid Annuallly) Price or Market Value of Bond $1,020 Number of years 20 Dividend of Preferred Stock $2.50 Market Price of Preferred Stock $35.00 Dividend growth rate 4% Market Value of Stock $50 Dividend paid last year $4.00 Tax Rate: 34% What is the firm's weighted average cost of capital? (10 points) .

Common Stock: Dividend growth rate 4% Market Value of Stock $50 Dividend paid last year $4.00 Tax Rate: 34% WACC = [(Kd*(1-T)*Wd) + (Kps *Wps) + (Kcs*Wcs)] 0.087053

of capital to use in the evaluation of the purchase of a new warehouse facility. You have been given the following facts: e the cost of common equity). $2.50 $35.00 PMT $60.00 Yield 6% Kd 0.0564 Kps 0.0714285714286 Kcs 12.3200% Dividend of Preferred Stock Market Price of Preferred Stock

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