Q4 National Computer Corporation (NCC) plans to raise 30% of its required capital as debt, 10% as preferred stock, and 60% as common equity. This is its capital structure. If NCC can borrow at an interest rate of 11%, and if it has a marginal tax rate of 40%, NCC has preferred stock that pays a S10 dividend per share and sells for S100 per share. If NCC issued new shares of preferred stock, it would incur an underwriting ( or flotation) cost of 2.5%, per share. The cost of equity 14%. Required: Calculate WACC of NCC
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.
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