question archive Given the following information, calculate the weighted average cost of capital for Puppet Corporation
Given the following information, calculate the weighted average cost of capital for Puppet Corporation
Subject:FinancePrice:2.86 Bought14
Given the following information, calculate the weighted average cost of capital for Puppet Corporation. Assume the funds are internally generated.
Percent of capital structure:
|
Debt |
59% |
|
Common equity |
35% |
|
Preferred stock |
6% |
Additional information:
|
Bond coupon rate |
7% |
|
Bond yield |
5% |
|
Bond flotation coat |
3% |
|
Dividend, common (just paid) $ |
1.09 |
|
Price, common $ |
30.00 |
|
Price, preferred $ |
35.00 |
|
Dividend, preferred |
9% |
|
Flotation cost, preferred $ |
1.97 |
|
Flotation cost, common |
4% |
|
Corporate growth rate |
6% |
|
Corporate tax rate |
44% |
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Weighted average cost of capital (Ka) = .0559 or 5.59%
Step-by-step explanation
Cost of debt after tax(Kd)= Yield (1- tax rate)
Cost of debt after tax(Kd)= .05 (1- .44)
Cost of debt after tax(Kd)= .05 × .56
Cost of debt after tax(Kd)= .028 or 2.8%
Preferred stock(Kp)= Dp/(Pp- F)
Preferred stock(Kp)= (35 ×.09) /(35 - 1.97)
Preferred stock(Kp)= 3.15 / 33.03
Preferred stock(Kp)= .0954 or 9.54%
Common Equity(Ke) = (D1/P0) + g
Common Equity(Ke) = (1.09/ 30) + .06
Common Equity(Ke) = .0363 + .06
Common Equity(Ke) = .0963 0r 9.63%
Weighted average cost of capital (Ka) =Cost of debt after tax(Kd) × (weight of debt) + Preferred stock(Kp) ×( weight of preferred stock)+ Common Equity(K) × ( weight of common equity)
Weighted average cost of capital (Ka) =.028(.59) + .0954(.06) + .0963(.35)
Weighted average cost of capital (Ka) = .0165 + .0057 + .0337
Weighted average cost of capital (Ka) = .0559 or 5.59%
