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Essentials Of Investments
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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Lipscomb Corporation is estimating its Weighted Average Cost of Capital (WACC). Its target capital structure is composed of 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Key details include: - The bonds have a 12 percent coupon rate, paid semiannually, a current maturity of 20 years, and sell for 1,000 USD. - The firm can issue preferred stock at par value of 100 USD, which pays a 12 percent annual dividend. However, flotation costs of 5 percent would be incurred. - Lipscomb is a constant-growth firm that just paid a dividend of 2.00 USD, sells for 27.00 USD per share, and has a growth rate of 8 percent. - The firm's marginal tax rate is 40 percent. There are no graphs or diagrams presented with this information.
Transcribed Image Text:Lipscomb Corporation is estimating its Weighted Average Cost of Capital (WACC). Its target capital structure is composed of 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Key details include: - The bonds have a 12 percent coupon rate, paid semiannually, a current maturity of 20 years, and sell for 1,000 USD. - The firm can issue preferred stock at par value of 100 USD, which pays a 12 percent annual dividend. However, flotation costs of 5 percent would be incurred. - Lipscomb is a constant-growth firm that just paid a dividend of 2.00 USD, sells for 27.00 USD per share, and has a growth rate of 8 percent. - The firm's marginal tax rate is 40 percent. There are no graphs or diagrams presented with this information.
Expert Solution
Step 1

Formula for WACC:

WACC = Cost of equity*% of equity + Cost of debt*% of debt*(1-tax rate) + Cost of preferred stock*% of preferred stock

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