McNabb Construction Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Reid, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has an outstanding bond with a 8.5 percent coupon rate and another bond with a 10.5 percent rate. The firm has been informed by its investment dealer that bonds of equal risk and credit ratings are now selling to yield 9.4 percent. The common stock has a price of $98.20 and an expected dividend (D₁) of $4.15 per share. The historical growth pattern (g) for dividends is as follows: $3.00 3.24 3.51 3.81 The preferred stock is selling at $90 per share and pays a dividend of $8.50 per share. The corporate tax rate is 40 percent. The flotation cost is 2.3 percent of the selling price for preferred stock. The optimum capital structure for the firm is 25 percent debt, 10 percent preferred stock, and 65 percent common equity in the form of retained earnings. a. Compute the historical growth rate. (Do not round intermediate calculations. Round the final to 2 decimal places.) Growth rate
McNabb Construction Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Reid, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has an outstanding bond with a 8.5 percent coupon rate and another bond with a 10.5 percent rate. The firm has been informed by its investment dealer that bonds of equal risk and credit ratings are now selling to yield 9.4 percent. The common stock has a price of $98.20 and an expected dividend (D₁) of $4.15 per share. The historical growth pattern (g) for dividends is as follows: $3.00 3.24 3.51 3.81 The preferred stock is selling at $90 per share and pays a dividend of $8.50 per share. The corporate tax rate is 40 percent. The flotation cost is 2.3 percent of the selling price for preferred stock. The optimum capital structure for the firm is 25 percent debt, 10 percent preferred stock, and 65 percent common equity in the form of retained earnings. a. Compute the historical growth rate. (Do not round intermediate calculations. Round the final to 2 decimal places.) Growth rate
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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Concept explainers
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
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Transcribed Image Text:McNabb Construction Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Reid, the
vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital.
The company currently has an outstanding bond with a 8.5 percent coupon rate and another bond with a 10.5 percent rate. The firm
has been informed by its investment dealer that bonds of equal risk and credit ratings are now selling to yield 9.4 percent. The
common stock has a price of $98.20 and an expected dividend (D₁) of $4.15 per share. The historical growth pattern (g) for dividends
is as follows:
$3.00
3.24
3.51
3.81
The preferred stock is selling at $90 per share and pays a dividend of $8.50 per share. The corporate tax rate is 40 percent. The
flotation cost is 2.3 percent of the selling price for preferred stock. The optimum capital structure for the firm is 25 percent debt, 10
percent preferred stock, and 65 percent common equity in the form of retained earnings.
a. Compute the historical growth rate. (Do not round intermediate calculations. Round the final to 2 decimal places.)
Growth rate
Transcribed Image Text:b. Compute the cost of capital for the individual components in the capital structure. (Do not round intermediate calculations. Round
the final answers to 2 decimal places.)
Debt (Kd)
Preferred stock (Kp)
Common equity (Ke)
Cost of capital
%
%
c. Calculate the weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate
calculations. Round the final answers to 2 decimal places.)
Debt (Kd)
Preferred stock (Kp)
Common equity (Ke)
Weighted average cost of capital (Kg)
Weighted Cost
%
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