Cost of capital

R.S. Green has 250,000 shares of common stock outstanding at a market price of $28 a share. Next year’s annual dividend is expected to be $1.55 a share. The dividend growth rate is 2 percent. The firm also has 7,500 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7 percent coupon, pay interest semiannually, and mature in 7.5 years. The bonds are selling at 98 percent of face value. The company’s tax rate is 34 percent.

What is the firm’s weighted average cost of capital?

) MacLeod Manufacturing Company is trying to calculate its cost of capital for use in making capital budgeting decisions. Mr. Bailey, 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% coupon rate and another bond with an 8.2% coupon rate. The firm as been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.5%. The common stock has a price of $60 and an expected dividend of $1.95 per share. The last four per share dividends paid by the company have been $1.80, $1.64, $1.49, and $1.35. The preferred stock is selling for $80 per share and pays a dividend of $7.60 per share. The corporate tax rate is 30%, and the target (or optimal) capital structure is 25% debt, 10% preferred stock, and 65% common stock.

What is MacLeod’s weighted average cost of capital?

) R.S. Green has 250,000 shares of common stock outstanding at a market price of $28 a share. Next year’s annual dividend is expected to be $1.55 a share. The dividend growth rate is 2 percent. The firm also has 7,500 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7 percent coupon, pay interest semiannually, and mature in 7.5 years. The bonds are selling at 98 percent of face value. The company’s tax rate is 34 percent.

What is the firm’s weighted average cost of capital?

Solution:

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