A company faces increasing needs for capital. Fortunately, it has a Aa3 credit rating. The corporate...

 

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A company faces increasing needs for capital. Fortunately, it has a Aa3 credit rating. The corporate tax rate is 40%. The company's treasurer is trying to determine the corporation's current WACC in order to assess the profitability of capital budgeting projects. Historically, the firm's earnings and DPS have increased about 7.2% annually and this should continue in the future. The firm's common stock is selling at $62 per share, and the company will pay a $2.50 per share dividend (D1). The company's $92 preferred stock has been yielding 5% in the current market. Flotation costs for the company have been estimated by its investment banker to be $4.00 for preferred stock. The company's optimum capital structure is 30% debt, 20% preferred stock, and 50% common equity in the form of RE. Refer to the following table on bond issues for comparative yields on bonds of equal risk to the firm: Data on Bond Issues Issue Rating Price YTM Utilities Company A Aa2 Company B Aa3 Company C A2 $885.18 8.54% $889.25 8.53% $960.66 8.55% Industrials Company X Aaa $860.24 8.34% Company Y A2 $940.92 8.66% Company Z B2 $1,025.109.75% Use the accompanying table to compute the cost of debt, K. Compare to the utility bond credit rating for Company B. b. Compute the cost of preferred stock, K. c. Compute the cost of common equity in the form of RE, K. a. Calculate the weighted cost of each source of capital and the WACC. A company faces increasing needs for capital. Fortunately, it has a Aa3 credit rating. The corporate tax rate is 40%. The company's treasurer is trying to determine the corporation's current WACC in order to assess the profitability of capital budgeting projects. Historically, the firm's earnings and DPS have increased about 7.2% annually and this should continue in the future. The firm's common stock is selling at $62 per share, and the company will pay a $2.50 per share dividend (D1). The company's $92 preferred stock has been yielding 5% in the current market. Flotation costs for the company have been estimated by its investment banker to be $4.00 for preferred stock. The company's optimum capital structure is 30% debt, 20% preferred stock, and 50% common equity in the form of RE. Refer to the following table on bond issues for comparative yields on bonds of equal risk to the firm: Data on Bond Issues Issue Rating Price YTM Utilities Company A Aa2 Company B Aa3 Company C A2 $885.18 8.54% $889.25 8.53% $960.66 8.55% Industrials Company X Aaa $860.24 8.34% Company Y A2 $940.92 8.66% Company Z B2 $1,025.109.75% Use the accompanying table to compute the cost of debt, K. Compare to the utility bond credit rating for Company B. b. Compute the cost of preferred stock, K. c. Compute the cost of common equity in the form of RE, K. a. Calculate the weighted cost of each source of capital and the WACC.

Answer rating: 100% (QA)

a Step 16 Calculation of cost of debt Cost of Debt Cost of debt is ... View the full answer