Brook's Window Shields Incorporated is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Glass, 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 10.2 percent coupon rate and another bond with a 7.5 percent coupon rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.4 percent. The common stock has a price of $54 and an expected dividend (D₁) of $5.70 per share. The firm's historical growth rate of earnings and dividends per share has been 7.5 percent, but security analysts on Wall Street expect this growth to slow to 5 percent in future years. The preferred stock is selling at $50 per share and carries a dividend of $4.75 per share. The corporate tax rate is 40 percent. The flotation cost is 2.5 percent of the selling price for preferred stock. The optimum capital structure is 30 percent debt, 10 percent preferred stock, and 60 percent common equity in the form of retained earnings. a. Compute the cost of capital for the individual components in the capital structure. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Answer is complete but not entirely correct. Debt Preferred stock Weighted Cost 9.20% 9.74 % Common equity 15.56 %
Brook's Window Shields Incorporated is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Glass, 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 10.2 percent coupon rate and another bond with a 7.5 percent coupon rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.4 percent. The common stock has a price of $54 and an expected dividend (D₁) of $5.70 per share. The firm's historical growth rate of earnings and dividends per share has been 7.5 percent, but security analysts on Wall Street expect this growth to slow to 5 percent in future years. The preferred stock is selling at $50 per share and carries a dividend of $4.75 per share. The corporate tax rate is 40 percent. The flotation cost is 2.5 percent of the selling price for preferred stock. The optimum capital structure is 30 percent debt, 10 percent preferred stock, and 60 percent common equity in the form of retained earnings. a. Compute the cost of capital for the individual components in the capital structure. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Answer is complete but not entirely correct. Debt Preferred stock Weighted Cost 9.20% 9.74 % Common equity 15.56 %
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:Brook's Window Shields Incorporated is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Glass, 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 10.2 percent coupon rate and another bond with a 7.5 percent coupon rate. The
firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.4 percent.
The common stock has a price of $54 and an expected dividend (D₁) of $5.70 per share. The firm's historical growth rate of earnings
and dividends per share has been 7.5 percent, but security analysts on Wall Street expect this growth to slow to 5 percent in future
years.
The preferred stock is selling at $50 per share and carries a dividend of $4.75 per share. The corporate tax rate is 40 percent. The
flotation cost is 2.5 percent of the selling price for preferred stock. The optimum capital structure is 30 percent debt, 10 percent
preferred stock, and 60 percent common equity in the form of retained earnings.
a. Compute the cost of capital for the individual components in the capital structure.
Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.
Answer is complete but not entirely correct.
Debt
Preferred stock
Weighted Cost
9.20%
9.74 %
Common equity
15.56
%
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