During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task: (1) The firm’s tax rate is 40%. (2) The current price of Harry Davis’s 12% coupon, semi-annual payment, noncallable bonds with 15 years remaining to maturity is $1,225.72. Harry Davis does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. (3) The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $117. Harry Davis would incur flotation costs equal to 5% of the proceeds on a new issue. (4) Harry Davis’s common stock is currently selling at $50 per share. Its last dividend (D0) was $3.12, and dividends are expected to grow at a constant rate of 5.8% in the foreseeable future. Harry Davis’s beta is 1.2, the yield on T-bonds is 5.6%, and the market risk premium is estimated to be 6%. For the over-own-bond yield-plus- judgmental risk- premium approach, the firm uses a 3.2% risk premium. Harry Davis’s target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity. Required: Calculate WACC.
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make
many capital investments. Recently, though, capital costs have been declining, and the company has decided
to look seriously at a major expansion program proposed by the marketing department. Assume that you are
an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis’s cost of
capital. Jones has provided you with the following data, which she believes may be relevant to your task:
(1) The firm’s tax rate is 40%.
(2) The current price of Harry Davis’s 12% coupon, semi-annual payment, noncallable bonds with 15 years
remaining to maturity is $1,225.72. Harry Davis does not use short-term interest-bearing debt on a permanent
basis. New bonds would be privately placed with no flotation cost.
(3) The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual
Harry Davis would incur flotation costs equal to 5% of the proceeds on a new issue.
(4) Harry Davis’s common stock is currently selling at $50 per share. Its last dividend (D0) was $3.12, and
dividends are expected to grow at a constant rate of 5.8% in the foreseeable future. Harry Davis’s beta is 1.2,
the yield on T-bonds is 5.6%, and the market risk premium is estimated to be 6%. For the over-own-bond
yield-plus- judgmental risk- premium approach, the firm uses a 3.2% risk premium.
Harry Davis’s target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity.
Required:
Calculate WACC.
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