the weight of debt the weight of preferred stock the weight of common stock the cost of common stock Milner Sisters has 25,000 shares of common stock outstanding at a market price of $48 a share. The common stock just paid a $2.20 annual dividend and has a growth rate of 2.5 percent. There are 12,000 shares of 6 percent preferred stock outstanding at a market price of $62 a share. The outstanding bonds mature in 13 years, have a total face value of $750,000, a face value per bond of $1,000, and a market price of $1,011.92 each. The bonds pay 7 percent interest, semiannually. The tax rate is 34 percent. What is the firm's weighted average cost of capital

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15-06-2021
Business

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the weight of debt the weight of preferred stock the weight of common stock the cost of common stock Milner Sisters has 25,000 shares of common stock outstanding at a market price of $48 a share. The common stock just paid a $2.20 annual dividend and has a growth rate of 2.5 percent. There are 12,000 shares of 6 percent preferred stock outstanding at a market price of $62 a share. The outstanding bonds mature in 13 years, have a total face value of $750,000, a face value per bond of $1,000, and a market price of $1,011.92 each. The bonds pay 7 percent interest, semiannually. The tax rate is 34 percent. What is the firm's weighted average cost of capital

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amcool amcool · Answer 1 · 2021-06-19T07:43:14+02:00

Answer:

Firm's weighted average cost of capital = 6.12%

Explanation:

CV = Common equity value = Number of shares of common stock outstanding * Common stock market price per share = 25,000 * $48 = $1,200,000

PV = Preference share value = Number of shares of preference stock outstanding * Preferred stock market price per share = 12,000 * $62 = $744,000

DV = Debt value = Outstanding bonds market value = (Total face value / Face value per bond) * Market price per bond = ($750,000 / $1,000) * $1,011.92 = $758,940

VF = Value of the firm = CV + PV + DV = $1,200,000 + $744,000 + $758,940 = $2,702,940

WC = Weight of common share = CV / VF = $1,200,000 / $2,702,940 = 0.4440

WP = Weight of preference share value = PV / VF = $744,000 / $2,702,940 = 0.2753

WD = Weight of debt = DV / VF = $758,940 / $2,702,940 = 0.2808

ND = Next dividend = Annual dividend * (100% + Growth rate) = $2.20 * (100% + 2.5%) = $2.255

CE = Cost of common stock = (ND + (Common stock market price per share * Growth rate)) / Common stock market price per share = (2.255 + (48 *2.5%)) / 48 = 0.0720

ATCD = After tax cost of debt = This is obtained by imputing this function in a cell in an excel sheet “=Rate(Number of years maturity * 2,((Bond interest rate/2)*Bond Par value),-Bond selling price,Bond par value)*2*(1 - Tax rate)”. That is, input “=RATE(13*2, ((7%/2)*1000),- 1,011.92,1000)*2*(1-34%)” in a cell in an excel sheet and press enter (as done in the attached excel file). This gives 4.53%.

CP = Cost of preference stock = Dividend rate = 6%

Firm's weighted average cost of capital = (WC * CE) + (WP * CP) + (WD * ATCD) = (0.4440 * 0.0720) + (0.2753 * 6%) + (0.2808 * 4.53%) = 0.0612, or 6.12%