PART 1 A - COMPUTING A WEIGHTED AVERAGE COST OF CAPITAL (WACC)
A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions:
Source of Capital Target Market Proportions
Long-term debt 60%
Preferred stock 5%
Common stock equity 35%
Debt: The firm can sell a 15 year bond, compounded monthly, with a $1000 par value and 6.8% coupon rate for $1254. A flotation cost of 1.15% of the face value would also be required.
Preferred Stock: The firm has determined that it can issue preferred stock at $125 per share par value. The preferred stock wil pay a $6.75 per share annual dividend. The cost of issuing and selling the preferred will be $3.28 per share.
Common Stock: The firm's common stock is currently selling for $23.75per share. The firm will be paying a dividend of $5.25 at the end of the year. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.25. For a new issue of common stock to sell, it has been determined that the new issue would need to be underpriced at $1.50 per share and that the firm must pay $1.20per share in flotation costs.
The firm's marginal tax rate is 21%, plus 4% for state and local taxes. (ISTR = 25%)
To determine the firm's WACC, please complete the following steps, entering your formulas in the blue cells:
A. Calculate the rate for the bond, notice is has monthly compounding.
B. Calculate the after-tax cost of the bond.
C. Calculate the cost of the new issue of preferred stock.
D. Calculate the growth rate of the common stock dividends.
E. Calculate the cost of the new common stock issue.
F. Finally, calculate the firm's weighted average cost of capital assuming the firm has exhausted all retained earnings.
Standard formats for your calculations:
Debt Common Stock Preferred Stock Inputs
NPER Growth Rate Price
Coupon Price NPER New Issue Costs
Coupon Rate PV Adjusted Price
PMT FV Dividend
Mkt Price RATE =
Market Rate Formula Inputs Proportions WACC
FV Price Costs Amount
Compounding periods New Issue Costs
RATE= Adjusted Price TOTAL >>
D1
