he capital structure for Magellan Corporation is shown below. Currently, flotation costs are 13% of market value for a new bond issue and $3 per share for preferred stock. The dividends for common stock were $2.50 last year and have an estimated annual growth rate of 6%. Market prices are $1,020 for bonds, $20 for preferred stock, and $30 for common stock. Assume a 34% tax rate. Financing Type % of Future Financing Bonds (8%, $1k par, 16 year maturity) 36% Common equity 45% Preferred stock (5k shares outstanding, $50 par, $1.50 dividend) 19% Total % 100% Compute the company’s WACC. Is this WACC considered reasonable given the assumptions and other relevant information? Explain.
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
he capital structure for Magellan Corporation is shown below. Currently, flotation costs are 13% of market value for a new bond issue and $3 per share for
|
Financing Type |
% of Future Financing |
|
Bonds (8%, $1k par, 16 year maturity) |
36% |
|
Common equity |
45% |
|
Preferred stock (5k shares outstanding, $50 par, $1.50 dividend) |
19% |
|
Total % |
100% |
Compute the company’s WACC. Is this WACC considered reasonable given the assumptions and other relevant information? Explain.
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