During the past few years, Super Technologies 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 that had been proposed by the marketing department. As the assistant to the financial vice-president, it is your task is to estimate Super’s weighted average cost of capital (WACC). The VP has provided you with the following information: The firms’ tax rate is 40%. The current market price of Super’s outstanding bonds is $1,153.72. The bonds have an annual coupon rate of 12% and make coupon payments semiannually. The bonds mature in 15 years and have a par value of $1,000. The current price of the firm’s preferred stock is $113.10 per share. The stock has a $100 par value and a 10% annual dividend rate (paid annually). The current price of the firm’s common stock is $50 per share. Its last dividend was D0 = $4.19 per share. Dividends are paid semiannually and are expected to grow at an annual rate of 5% into the foreseeable future. 2020 Balance Sheet (thousands of dollars) cash 102 accounts payable 325 accounts receivable 400 notes payable 300 inventory 438 accruals 110 current assets 940 current liabilities 735 gross fixed assets 2550 long-term debt (bonds) 500 accum. depreciation 550 preferred stock 250 net fixed assets 2000 common stock 125 total assets 2940 paid-in capital 650 retained earnings 680 total common equity 1455 total liabilities and equity 2940 A. calculate the individual capital weights (wd, wps, wce) B. calculate the cost of debt (rd) C. calculate the cost of preferred stock (rps) D. calculate the cost of common equity (rce) E. combine your answers to A through D above and calculate the 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 past few years, Super Technologies 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 that had been proposed by the marketing department. As the assistant to the financial vice-president, it is your task is to estimate Super’s weighted average cost of capital (WACC). The VP has provided you with the following information:
- The firms’ tax rate is 40%.
- The current market price of Super’s outstanding bonds is $1,153.72. The bonds have an annual coupon rate of 12% and make coupon payments semiannually. The bonds mature in 15 years and have a par value of $1,000.
- The current price of the firm’s
preferred stock is $113.10 per share. The stock has a $100 par value and a 10% annualdividend rate (paid annually).
- The current price of the firm’s common stock is $50 per share. Its last dividend was D0 = $4.19 per share. Dividends are paid semiannually and are expected to grow at an annual rate of 5% into the foreseeable future.
2020
cash 102 accounts payable 325
accounts receivable 400 notes payable 300
inventory 438 accruals 110
current assets 940 current liabilities 735
gross fixed assets 2550 long-term debt (bonds) 500
accum.
net fixed assets 2000 common stock 125
total assets 2940 paid-in capital 650
total common equity 1455
total liabilities and equity 2940
A. calculate the individual capital weights (wd, wps, wce)
B. calculate the cost of debt (rd)
C. calculate the cost of preferred stock (rps)
D. calculate the
E. combine your answers to A through D above and calculate the WACC.
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