The current capital structure of stewart-line corporation is as follows:

Bonds (7 %, $1000 par 15 years)                 $75,000

Preferred stock ($100 par, 7.25% dividend)          $1,000,000

Common stock:

Par value ($2.50 par)                       $500,000

Retained earnings                           $350,000

Total                                                                                      850,000

Other information about stewart-line corportation:

The market price is $975 for the bonds, $60 for the preferred stock, and $21 for common stock. Flotation costs are 9% for bonds and 5% for preferred stock. The firm’s tax rate is 46%. Common stock will pay a $2.80 dividend which is not expected to grow.

1. Calculate the weighted cost of capital using only internal common equity
2. Why do we need to determine the firm’s overall weighted cost of capital and not just the individual component cost of capital?

Answer rating: 100% (QA)

To calculate the weighted cost of capital WACC using only internal common equity we need to consider the weights of each component of the capital structure and their respective costs Given information ... View the full answer