Bob-Bye, Inc. has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The WACC is to be measured by using the following weights:: 40% long term debt, 10% preferred stock, and 50% common stock equity (retained earnings,new common stock or both). The firm’s tax is 30%. Debt: The firm can sell for P980, a 10-year, P1,000 par value bond paying annual interest at 13% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of P20 per bond. Preferred Stock: 8 percent (annual divided) preferred stock having a par value of P100 can be sold for P65. An additional fee of P2 per share must be paid to the underwriters. Common Stock: The firm’s common stock is currently selling for P50 per share. The dividend expected to be paid at the end of the coming year is P4 per share.. Its dividend payments which have been approximately 60% of earnings per share in each of the past 5 years, shown below has an average growth rate of 7.5% annually. Year Dividend Year Dividend 2019 P 3.75 2016 P3.15 2018 3.50 2015 2.85 2017 3.30 It is expected that to attract buyers, new common stock must be under-priced P5 per share, and the firm must also pay P3 per share in flotation costs. Dividend payments are expected to continue at 60% earnings. Required: Compute the weighted average cost of capital (WACC) assuming retained earnings is sufficient to cover the equity portion of fund Compute the average cost of capital (WACC) assuming retained earnings is not sufficient to cover the equity portion, so new issue common stock should be issued.
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
Bob-Bye, Inc. has asked its
Debt: The firm can sell for P980, a 10-year, P1,000 par
Preferred Stock: 8 percent (annual divided) preferred stock having a par value of P100 can be sold for P65. An additional fee of P2 per share must be paid to the underwriters.
Common Stock: The firm’s common stock is currently selling for P50 per share. The dividend expected to be paid at the end of the coming year is P4 per share..
Its dividend payments which have been approximately 60% of earnings per share in each of the past 5 years, shown below has an average growth rate of 7.5% annually.
|
Year |
Dividend |
Year |
Dividend |
|
2019 |
P 3.75 |
2016 |
P3.15 |
|
2018 |
3.50 |
2015 |
2.85 |
|
2017 |
3.30 |
|
|
It is expected that to attract buyers, new common stock must be under-priced P5 per share, and the firm must also pay P3 per share in flotation costs.
Dividend payments are expected to continue at 60% earnings.
Required:
- Compute the weighted average cost of capital (WACC) assuming retained earnings is sufficient to cover the equity portion of fund
- Compute the average cost of capital (WACC) assuming retained earnings is not sufficient to cover the equity portion, so new issue common stock should be issued.
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Please solve this manually. I can't understand if the solution is in excel. Thank you!
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