You are in charge of estimating you company’s weighted average cost of capital. The company's target capital structure is 30% debt, 20% preferred stock, and 50% common stock. Its current before-tax cost of debt is 11.1%, and flotation cost for debt can be ignored. Its preferred stock has a before-tax cost of 12.6%. The company has just paid a common stock dividend (Do) of $4.63 and expects to have a constant dividend growth rate of 6%. Its common stock currently sells for $30 per share. Flotation cost on new common stock would total 9.5%. Its tax rate is 40%. Compute (a) the company's cost of newly issued common stock (using the Dividend Growth Model) and (b) the company’s WACC when the newly issued common stock is used as the common equity component. Round your answers to two decimal places of %, but ignore % in your answer, e.g., xx.xx. (Hint: Measure the cost of common stock first and then use the WACC formula) Cost of common stock = % ; Company WACC = %
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 in charge of estimating you company’s weighted average cost of capital. The company's target capital structure is 30% debt, 20%
Compute (a) the company's cost of newly issued common stock (using the Dividend Growth Model) and (b) the company’s WACC when the newly issued common stock is used as the common equity component. Round your answers to two decimal places of %, but ignore % in your answer, e.g., xx.xx. (Hint: Measure the cost of common stock first and then use the WACC formula)
Cost of common stock = % ; Company WACC = %
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