Problem 11-26 Given the following information, calculate the weighted average cost of capital for Puppet Corporation. (Round interm calculations to 2 decimal places. Round the final answers to 2 decimal places.) Percent of capital structure: Debt Preferred stock Common equity Additional information: Bond coupon rate Bond yield Bond flotation cost Dividend, expected common Price, common Dividend, preferred Flotation cost, preferred Flotation cost, common Corporate growth rate Corporate tax rate 50% 20 30 8.5% 9.00% 2% $1.50 $30.00 7% 3% 4.00% 5% 35% a. Calculate the cost of capital assuming use of internally generated funds. Internal capital cost. 1% b. Calculate the cost of capital assuming use of externally generated funds. External capital cost c. This part of the question is not part of your Connect assignment. 4
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Step by step
Solved in 5 steps with 6 images
