Problem 11-25 Required: Step 1: Compute the historical growth rate (see below).

Use the following information for questions 15-19

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 10.6 percent coupon rate and another bond with an 8.2 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.5 percent. The common stock has a price of $65 and an expected dividend (D₁) of $1.50 per share. The historical growth pattern (g) for dividends is as follows

$1.40

1.54

1.69

1.85

Compute the historical growth rate, round it to the nearest whole number, and use it for g.

Problem 11-25 Required: Compute the cost of debt.

Use the following information for questions 15-19

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 10.6 percent coupon rate and another bond with an 8.2 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.5 percent. The common stock has a price of $65 and an expected dividend (D₁) of $1.50 per share. The historical growth pattern (g) for dividends is as follows

$1.40

1.54

1.69

1.85

The preferred stock is selling at $85 per share and pays a dividend of $8.50 per share. The corporate tax rate is 40 percent. The flotation cost is 2.6 percent of the selling price for preferred stock. The optimal capital structure for the firm is 35 percent debt, 5 percent preferred stock, and 60 percent common equity in the form of retained earnings.

Problem 11-25 Required: Compute the cost of Preferred Stock

Use the following information for questions 15-19

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 10.6 percent coupon rate and another bond with an 8.2 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.5 percent. The common stock has a price of $65 and an expected dividend (D₁) of $1.50 per share. The historical growth pattern (g) for dividends is as follows

$1.40

1.54

1.69

1.85

The preferred stock is selling at $85 per share and pays a dividend of $8.50 per share. The corporate tax rate is 40 percent. The flotation cost is 2.6 percent of the selling price for preferred stock. The optimal capital structure for the firm is 35 percent debt, 5 percent preferred stock, and 60 percent common equity in the form of retained earnings.

Problem 11-25 Required: Compute the cost of Common Equity

Use the following information for questions 15-19

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 10.6 percent coupon rate and another bond with an 8.2 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.5 percent. The common stock has a price of $65 and an expected dividend (D₁) of $1.50 per share. The historical growth pattern (g) for dividends is as follows

$1.40

1.54

1.69

1.85

The preferred stock is selling at $85 per share and pays a dividend of $8.50 per share. The corporate tax rate is 40 percent. The flotation cost is 2.6 percent of the selling price for preferred stock. The optimal capital structure for the firm is 35 percent debt, 5 percent preferred stock, and 60 percent common equity in the form of retained earnings.

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Problem 11-25 Required: From your answers in Questions 16-18, compute the Weighted Average Cost of Capital

Use the following information for questions 15-19

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 10.6 percent coupon rate and another bond with an 8.2 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.5 percent. The common stock has a price of $65 and an expected dividend (D₁) of $1.50 per share. The historical growth pattern (g) for dividends is as follows

$1.40

1.54

1.69

1.85

The preferred stock is selling at $85 per share and pays a dividend of $8.50 per share. The corporate tax rate is 40 percent. The flotation cost is 2.6 percent of the selling price for preferred stock. The optimal capital structure for the firm is 35 percent debt, 5 percent preferred stock, and 60 percent common equity in the form of retained earnings.