Wax Engineering Inc. (WEI) has the following capital structure, which is considered to be optimal: Debt 40% Preferred stock 10% Common equity 50% 100% The risk-free rate is 7%, the market risk premium is 6%, and WEI’s beta is 1.2. The current price of the common stock is $50, its current dividend is $4.19, and they are expected to grow at 5% per year in the future. WEI’s bonds earn a return of 10%, and the risk premium on its stock over its own bond is estimated as 4%. WEI’s tax rate is 40%. WEI can obtain new capital in the following ways: · Preferred stock: New preferred stock with a dividend of $10 can be sold to the public at a price of $111.10 per share. · Debt: Debt can be sold at an interest rate of 10 percent. Determine the cost of common equity using the bond-yield-plus-risk premium approach. Which answers? 13.8% 13.0% 14.2% 14.0%
Wax Engineering Inc. (WEI) has the following capital structure, which is considered to be optimal: Debt 40% Preferred stock 10% Common equity 50% 100% The risk-free rate is 7%, the market risk premium is 6%, and WEI’s beta is 1.2. The current price of the common stock is $50, its current dividend is $4.19, and they are expected to grow at 5% per year in the future. WEI’s bonds earn a return of 10%, and the risk premium on its stock over its own bond is estimated as 4%. WEI’s tax rate is 40%. WEI can obtain new capital in the following ways: · Preferred stock: New preferred stock with a dividend of $10 can be sold to the public at a price of $111.10 per share. · Debt: Debt can be sold at an interest rate of 10 percent. Determine the cost of common equity using the bond-yield-plus-risk premium approach. Which answers? 13.8% 13.0% 14.2% 14.0%
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
Question
Wax Engineering Inc. (WEI) has the following capital structure, which is considered to be optimal:
Debt 40%
Preferred stock 10%
Common equity 50%
100%
The risk-free rate is 7%, the market risk premium is 6%, and WEI’s beta is 1.2. The current price of the common stock is $50, its current dividend is $4.19, and they are expected to grow at 5% per year in the future. WEI’s bonds earn a return of 10%, and the risk premium on its stock over its own bond is estimated as 4%. WEI’s tax rate is 40%.
WEI can obtain new capital in the following ways:
· Preferred stock: New preferred stock with a dividend of $10 can be sold to the public at a price of $111.10 per share.
· Debt: Debt can be sold at an interest rate of 10 percent.
Determine the cost of common equity using the bond-yield-plus-risk premium approach.
Which answers?
13.8%
13.0%
14.2%
14.0%
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