A company has the following target capital structure and costs: Capital structure Cost of capital Debt 30% 10% Common stock 60% 12% Preferred stock 10% 10% The company's marginal tax rate is 30%. What is the company's weighted-average cost of capital?
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A company has the following target capital structure and costs:
|
Capital structure |
Cost of capital |
Debt |
30% |
10% |
Common stock |
60% |
12% |
|
10% |
10% |
The company's marginal tax rate is 30%. What is the company's weighted-average cost of capital?
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- Assume that your company is trying to determine its optimal capital structure, which consists only of debt and common stock. To estimate the cost of debt, the company has produced the following table: 09.86% 9.56% Percent Financed With Debt 10.16% 8.96% 9.26% 0.10 0.20 0.30 0.40 0.50 Percent Financed With Equity 0.90 0.80 0.70 0.60 0.50 Debt/Equity Ratio Now assume that the company's tax rate is 40 percent, that the company uses the CAPM to estimate its cost of common equity, Ks, that the risk-free rate is 5 percent and the market risk premium is 6 percent. Finally assume that if it has no debt its WACC would be equal to its cost of equity which would be equal to 11 percent (you should now be able to determine its "unlevered beta," bu). 0.10/0.90 0.11 0.20/0.80 0.25 Given this information, determine the firm's cost of capital if it finances with 40 percent debt and 60 percent equity. 0.30/0.70=0.43 0.40/0.600.67 0.50/0.50 = 1.00 Bond Rating AA A A BB B Before-Tax Cost of Debt 7.0% 7.2%…Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 50% long-term debt, 15% preferred stock, and 35% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 29%. Debt The firm can sell for $1015 a 20-year, $1,000-par-value bond paying annual interest at a 6.00% coupon rate. A flotation cost of 2% of the par value is required. Preferred stock 9.50% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $2 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $90 per share. The stock has paid a dividend that has gradually increased for many years, rising from $3.00 ten years ago to the $5.63 dividend payment,…Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 50% long-term debt, 15% preferred stock, and 35% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 21%. Debt The firm can sell for $1030 a 17-year, $1,000-par-value bond paying annual interest at a 9.00% coupon rate. A flotation cost of 3% of the par value is required. Preferred stock 10.00% (annual dividend) preferred stock having a par value of $100 can be sold for $94. An additional fee of $6 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $50 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.50 ten years ago to the $3.70 dividend payment, Do, that the company just recently…
- Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 30% long-term debt, 15% preferred stock, and 55% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 22%. Debt The firm can sell for $1015 a 10-year, $1,000-par-value bond paying annual interest at a 8.00% coupon rate. A flotation cost of 2% of the par value is required. Preferred stock 8.50% (annual dividend) preferred stock having a par value of $100 can be sold for $96. An additional fee of $4 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $60 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.70 ten years ago to the $5.07 dividend payment,…You have collected the following information about a company: Source of capital Market value Book value After-tax cost Long-term debt 100,000 100,000 0.08 Preferred stock 60,000 72,000 0.11 Common stock 200,000 100,000 0.15 Total 360,000 272,000 What is the weighted average cost of capital using market values?Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 30% long-term debt, 15% preferred stock, and 55% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 22%. Debt The firm can sell for $1025 a 18-year, $1,000-par-value bond paying annual interest at a 8.00% coupon rate. A flotation cost of 4% of the par value is required. Preferred stock 10.00% (annual dividend) preferred stock having a par value of $100 can be sold for $92. An additional fee of $2 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $59.43 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.00 ten years ago to the $3.26 dividend payment, Do, that the company just recently…
- Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 35% long-term debt,15% preferred stock, and 50%common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 29%. Debt The firm can sell for $1000 a 15-year, $1,000-par-value bond paying annual interest at a 11.00%coupon rate. A flotation cost of 2.5% of the par value is required. Preferred stock 8.50% (annual dividend) preferred stock having a par value of $100 can be sold for $98.An additional fee of $3 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $90 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.70 ten years ago to the $4.84 dividend payment,…Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 10% preferred stock, and 50% common stock equity (retained eamings, new common stock, or both). The firm's tax rate is 21% Debt The firm can sell for $1020 a 10-year, $1,000-par-value bond paying annual interest at a 7.00% coupon rate: A flotation cost of 3% of the par value is required. Preferred stock 8.00% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $2 per share must be paid to the underwriters Common stock The firm's common stock is currently selling for 559 43 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.70 ten years ago to the $4.00 dividend payment, Do, that the company just recently…Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 35% long-term debt, 25% preferred stock, and 40% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 28%. Debt The firm can sell for $1010 a 17-year, $1,000-par-value bond paying annual interest at a 8.00% coupon rate. A flotation cost of 3.5% of the par value is required. Preferred stock 7.00% (annual dividend) preferred stock having a par value of $100 can be sold for $92. An additional fee of $4 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $70 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.75 ten years ago to the $4.48 dividend payment, Do, that the company just recently…
- Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 15% preferred stock, and 45% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 23%. Debt The firm can sell for $1010 a 14-year, $1,000-par-value bond paying annual interest at a 8.00% coupon rate. A flotation cost of 3.5% of the par value is required. Preferred stock 7.00% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $4 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $80 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.50 ten years ago to the $4.92 dividend payment, D, that the company just recently…As an Analyst you were tasked to compute for the Weighted Average Cost of Capital of variouscompanies given the following information. Income tax rate is 25% a. What is the cost of equity of each companies?b. What is the after tax cost of debt of each companies?c. What is the WACC of each companies? W Corp A Corp Co. Corp Ca Corp Risk Free rate 4.00% 3.00% 2.00% 3.50% Beta 1.25 % 1.50% 1.30% 1.40% Market Return 12.00% 11.00 % 10:00% 8:00% Debt to Equity Ratio 2.5 3 4 3.5 Credit Spread om BPS 200 300 250 150A firm has two components in its capital structure, debt and equity. The after-tax cost of debt is 3% and the cost of equity is 11%. The proportion of equity in the capital structure is 75%. What is the firm's Weighted Average Cost of Capital? Select one: a. 9.47% b. 8.78% c. 9.00% d. 8.37%
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