Determine the weighted average cost of capital for the firm

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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A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.


Source of Capital       Target Market Proportions
Long Term Debt              25%
Preferred Stock               15%
Common Stock               60%
Total Firm Value             100%


Debt: The firm can sell a 10-year, RM1,000 par value, 6% bond for RM945.
Preferred Stock: The firm has determined it can issue preferred stock at RM70 per share par value. The stock will pay a RM8 annual dividend.
Common Stock: A firm's common stock is currently selling for RM19 per share.

The dividend expected to be paid at the end of the coming year is RM1.85. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was RM1.50. Additionally, the firm's marginal tax rate is 35%.
Determine the weighted average cost of capital for the firm.

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