Estimate the company’s cost of debt capital

A public corporation in which you own common stock reported a WACC of 10.7% for the year in its annual report to stockholders. The common stock that you own has averaged a total return of 6% per year over the last 3 years. The annual report also mentions that projects within the corporation are 80% funded by its own capital.

Estimate the company’s cost of debt capital. Does this seem like a reasonable rate for borrowed funds?

Tiffany Baking Co. wants to arrange for $50 million in capital for manufacturing a new consumer product. The current financing plan is 60% equity capital and 40% debt financing. Compute the WACC for the following financing scenario. Equity capital: 60%, or $35 million, via common stock sales for 40% of this amount that will pay dividends at a rate of 5% per year, and the remaining 60% from retained earnings, which currently earn 9% per year. Debt capital: 40%, or $15 million, obtained through two sourcesbank loans for $10 million borrowed at 8% per year, and the remainder in conveltible bonds at an estimated 10% per year bond interest rate.


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