A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice president of finance, has given you the following information and has asked you to compute the weighted average cost of capital.
A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice president of finance, has given you the following information and has asked you to compute the weighted average cost of capital.
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
Problem 1PS
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Transcribed Image Text:Question 2:
A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a
capital budgeting decision. Mr. Jeter, the vice president of finance, has given you the following
information and has asked you to compute the weighted average cost of capital.
The company currently has outstanding a bond with a 10.6 percent coupon rate and another
bond with an 8.2 percent rate. The firm has been informed by its investment banker that bonds
of equal risk and credit rating are now selling to yield 11.5 percent. The common stock has a
price of $65 and an expected dividend (D1) of $1.50 per share. The historical growth pattern (g)
for dividends is as follows:
$1.40
1.54
1.69
1.85
Compute the historical growth rate, round it to the nearest whole number, and use it for g The
preferred stock is selling at $85 per share and pays a dividend of $8.50 per share. The corporate
tax rate is 25 percent. The flotation cost is 2.6 percent of the selling price for preferred stock.
The optimal capital structure for the firm is 35 percent debt, 5 percent preferred stock, and 60
percent common equity in the form of retained earnings.
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