You are given the task of calculating the cost of capital of KaBoom Toy Company. The company faces a tax rate of 40%. The company has 100,000 common shares and 10,000 preferred shares outstanding. Each preferred share has a par value of $60, and is currently priced at 90% of the par value. The preferred shares are paying dividends that total 5% of the par value. You estimate that the beta of the common stock is 1.5. The equity market risk premium is estimated to be 5%, and the risk-free rate is 5%. The company has just paid a dividend of $2 per share. You expect that the dividends will grow at a rate of 15% until Year 4. After Year 4, the dividends are expected to grow at a constant rate of 5% forever. You decide to employ the CAPM approach to calculate the cost of equity. The company has two different debt issues that are outstanding. The first issue consists of 1,000 semi-annual coupon bonds. Each bond has a face value of $1,000. The annual coupon rate is 10%, and the bonds are currently trading at a YTM that equals 12%. The bonds will mature 10 years from now. The second issue consists of 1,000 zero coupon bonds. Each bond has a face value of $1,000, and will mature 15 years from now. The zero coupon bonds are trading at 50% of their face value. Using the information provided above, calculate the weighted average cost of capital of KaBoom Toy Company
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.
You are given the task of calculating the cost of capital of KaBoom Toy Company. The company faces a tax rate of 40%. The company has 100,000 common shares and 10,000 preferred shares outstanding. Each
The company has two different debt issues that are outstanding. The first issue consists of 1,000 semi-annual coupon bonds. Each bond has a face value of $1,000. The annual coupon rate is 10%, and the bonds are currently trading at a YTM that equals 12%. The bonds will mature 10 years from now. The second issue consists of 1,000 zero coupon bonds. Each bond has a face value of $1,000, and will mature 15 years from now. The zero coupon bonds are trading at 50% of their face value.
Using the information provided above, calculate the weighted average cost of capital of KaBoom Toy Company
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