Question 1
Lowe Corp has asked its financial manager to measure the cost of each specific type
of capital as well as the weighted average cost of capital. The firm's tax rate is 40%.
Debt: The firm can sell for $1,000, 10-year, $1,000-par-value bond paying annual
interest at 9% coupon rate. The number of bonds outstanding is 1 million.
Common stock: The firm's common stock is currently selling for $50 per share. The
number of stocks issued is 60 million. We also observe the history of company
dividends.
Year
Dividend
2014
$1.10
2015
1.20
2016
1.35
2017
1.40
2018
1.55
a. Compute the after-tax cost of debt.
b.%Estimate the company's dividend growth rate
c. Compute the cost of common stock.
d.%Compute the WACC for Felix Corp.
e. Discuss the impact of rising or falling interest rates on the company's borrowing
costs and the overall WACC calculation.