a. Compute the cost of capital for the individual components in the capital structure. Note: Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Debt Preferred stock Common equity Weighted Cost % % %
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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.
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- Brook's Window Shields Incorporated is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Glass, the vice president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 10.2 percent coupon rate and another bond with a 7.5 percent coupon rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.4 percent. The common stock has a price of $54 and an expected dividend (D₁) of $5.70 per share. The firm's historical growth rate of earnings and dividends per share has been 7.5 percent, but security analysts on Wall Street expect this growth to slow to 5 percent in future years. The preferred stock is selling at $50 per share and carries a dividend of $4.75 per share. The corporate tax rate is 40 percent. The flotation cost is 2.5 percent of the selling price for preferred…A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 10.1 percent coupon rate and another bond with an 7.7 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.0 percent. The common stock has a price of $55 and an expected dividend (D1) of $1.75 per share. The historical growth pattern (g) for dividends is as follows: S $ 1.30 1.44 1.59 1.75 The preferred stock is selling at $75 per share and pays a dividend of $7.10 per share. The corporate tax rate is 30 percent. The flotation cost is 2.0 percent of the selling price for preferred stock. The optimum capital structure for the firm is 25 percent debt, 10 percent preferred stock, and 65…A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 10.9 percent coupon rate and another bond with an 8.5 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.8 percent. The common stock has a price of $63 and an expected dividend (D1) of $1.83 per share. The historical growth pattern (g) for dividends is as follows: $1.38 1.52 1.67 1.83 The preferred stock is selling at $83 per share and pays a dividend of $7.90 per share. The corporate tax rate is 30 percent. The flotation cost is 2.0 percent of the selling price for preferred stock. The optimum capital structure for the firm is 25 percent debt, 15 percent preferred stock, and 60 percent…
- A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 10.8 percent coupon rate and another bond with an 8.4 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.7 percent. The common stock has a price of $62 and an expected dividend (D₁) of $1.82 per share. The historical growth pattern (9) for dividends is as follows: $1,37 1,51 1.66 1.82 The preferred stock is selling at $82 per share and pays a dividend of $7.80 per share. The corporate tax rate is 30 percent. The fioration cost is 2.0 percent of the selling price for preferred stock. The optimum capital structure for the firm is 30 percent debt, 10 percent preferred stock, and 60 percent…A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 11.5 percent coupon rate and another bond with an 9.1 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 12.4 percent. The common stock has a price of $69 and an expected dividend (D₁) of $1.89 per share. The historical growth pattern (g) for dividends is as follows: $ 1.44 1.58 1.73 1.89 The preferred stock is selling at $89 per share and pays a dividend of $8.50 per share. The corporate tax rate is 30 percent. The flotation cost is 2.0 percent of the selling price for preferred stock. The optimum capital structure for the firm is 25 percent debt, 20 percent preferred stock, and 55 percent…A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 11.0 percent coupon rate and another bond with an 8.6 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.9 percent. The common stock has a price of $64 and an expected dividend (D1) of $1.84 per share. The historical growth pattern (g) for dividends is as follows: $ 1.39 1.53 1.68 1.84 The preferred stock is selling at $84 per share and pays a dividend of $8.00 per share. The corporate tax rate is 30 percent. The flotation cost is 3.0 percent of the selling price for preferred stock. The optimum capital structure for the firm is 25 percent debt, 20 percent…
- A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 11.3 percent coupon rate and another bond with an 8.9 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 12.2 percent. The common stock has a price of $67 and an expected dividend (D1) of $1.87 per share. The historical growth pattern (g) for dividends is as follows: $1.42 1.56 1.71 1.87 The preferred stock is selling at $87 per share and pays a dividend of $8.30 per share. The corporate tax rate is 30 percent. The flotation cost is 3.0 percent of the selling price for preferred stock. The optimum capital structure for the firm is 30 percent debt, 10 percent preferred stock, and 60 percent…A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 11.4 percent coupon rate and another bond with an 9.0 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 12.3 percent. The common stock has a price of $68 and an expected dividend (D1) of $1.88 per share. The historical growth pattern (g) for dividends is as follows: $ 1.43 1.57 1.72 1.88 The preferred stock is selling at $88 per share and pays a dividend of $8.40 per share. The corporate tax rate is 30 percent. The flotation cost is 2.0 percent of the selling price for preferred stock. The optimum capital structure for the firm is 25 percent debt, 15 percent…8. Daleel plc is trying to introduce an improved method of assessing investment projects using discounted cash flow techniques. For this it has to obtain a cost of capital to use as a discount rate. The finance department has assembled the following information: – The company has an equity beta of 0.80, which may be taken as the appropriate adjustment to the average risk premium. The yield on risk-free government securities is 6.5 per cent and the historic premium above the risk-free rate is estimated at 5 per cent for shares. – The market value of the firm’s debt is thrice the value of its equity. – The cost of borrowed money to the company is estimated at 12 per cent (before tax shield benefits). – Corporation tax is 35 per cent. Assume: No inflation. Create an estimate of the weighted average cost of capital (WACC).
- OOOO As a financial analyst for a firm looking to make an investment in its operations, you are tasked with determining how upcoming projects are financed. Because the board of directors decided years ago that it would not offer preferred stock, the firm is comprised of only debt and equity financing. Given the following analysis of optional capital Ostructures, which is the optimal capital structure? Proportion of Debt After-Tax Cost Cost of Weighted Financing of Debt Equity Cost 0% 5% 9% 9.00% 10% 5% 9% 8.60% 20% 5% 9% 8.20% 30% 5% 9% 7.80% 40% 5% 10% 8.00% 50% 6% 11% 8.50% 60% 7% 13% 9.40% 70% 10% 17% 12.10% 80% 12% 20% 13.60% 90% 15% 25% 16.00% 100% 18% 25% 18.00% • . O · O 0 a. 30 percent b. 40 percent O c. 100 percent O d. 0 percent Icon KovA-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 9.6 percent coupon rate and another bond with an 7.2 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 10.5 percent. The common stock has a price of $50 and an expected dividend (D1) of $1.70 per share. The historical growth pattern (g) for dividends is as follows: $ 1.25 1.39 1.54 1.70 The preferred stock is selling at $70 per share and pays a dividend of $6.60 per share. The corporate tax rate is 30 percent. The flotation cost is 2.0 percent of the selling price for preferred stock. The optimum capital structure for the firm is 25 percent debt, 10 percent…A company hired you as a consultant to help estimate its cost of capital. You have obtained the following data: (1) rd = yield on the firm’s bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) rRF = 5.00%, RPM = 6.00%, and b = 1.50. (3) D1 = $1.20, P0 = $35.00, and g = 8.00% (constant). You were asked to estimate the cost of equity based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference? Group of answer choices 2.61% 2.67% 3.54% 3.00% 3.72%