4) Delta Corporation's weighted average cost of capital is to be measured by using the following weights – 40% long-term debt, 10% preferred stock, 40% common stock and 10% retained earnings. The company is subject to 40% tax rate. Debt – The firm can sell for $980 a 10 years, $1000 par value bond paying annual interest at a 10% coupon rate. An issue cost of 3% of the par value would be required in addition to the discount of $20 per bond. Preferred Stock - 8% preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Common Stock – It is selling for $50 per share. The current (1994) dividend is $3.75 per share. The following table shows the dividend pattern of the company - Dividend ($) 3.75 Year 1994 1993 3.5 1992 3.30
4) Delta Corporation's weighted average cost of capital is to be measured by using the following weights – 40% long-term debt, 10% preferred stock, 40% common stock and 10% retained earnings. The company is subject to 40% tax rate. Debt – The firm can sell for $980 a 10 years, $1000 par value bond paying annual interest at a 10% coupon rate. An issue cost of 3% of the par value would be required in addition to the discount of $20 per bond. Preferred Stock - 8% preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Common Stock – It is selling for $50 per share. The current (1994) dividend is $3.75 per share. The following table shows the dividend pattern of the company - Dividend ($) 3.75 Year 1994 1993 3.5 1992 3.30
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:4) Delta Corporation's weighted average cost of capital is to be measured by using the
following weights– 40% long-term debt, 10% preferred stock, 40% common stock and
10% retained earnings. The company is subject to 40% tax rate.
Debt – The firm can sell for $980 a 10 years, $1000 par value bond paying annual
interest at a 10% coupon rate. An issue cost of 3% of the par value would be required in
addition to the discount of $20 per bond.
Preferred Stock – 8% preferred stock having a par value of $100 can be sold for $65. An
additional fee of $2 per share must be paid to the underwriters.
Common Stock – It is selling for $50 per share. The current (1994) dividend is $3.75 per
share. The following table shows the dividend pattern of the company -
Year
Dividend ($)
1994
3.75
1993
3.5
1992
3.30
1991
3.15
1990
2.85
New common stock must be underpriced $5 per share & the issue cost is $3 per share.
Retained Earnings - The company has $10,000 retained earnings which will be used to
finance the capital. Company is using both common stock and retained earnings.
Calculate the cost of debt, preferred stock, common stock, retained earnings and
Weighted Average Cost of Capital for Delta Corporations.
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