Given the following information Percent of capital structure

Given the following information:

Percent of capital structure:

Preferred stock 20 %

Common equity 40

Debt 40

Additional information:

Corporate tax rate 34 %

Dividend, preferred $ 8.50

Dividend, expected common $ 2.50

Price, preferred $ 105.00

Growth rate 7 %

Bond yield 9.5 %

Flotation cost, preferred $ 3.60

Price, common $ 75.00

Calculate the weighted average cost of capital for Digital Processing Inc. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

Debit: _____%

Perferred Stock:____

Common Equity:_____

Weighted Average Cost of Capital:______%

Solution

Cost of debt = Yield x (1-Tax) = 9.5%*(1-34%) = 6.27%

.

Cost of preference = Dividend / (Price-Flotation cost) = 8.5/(105-3.60) = 8.38%

.

Cost of equity = (Dividend*(1+Growth rate) / Price of equity) + Growth rate

= (2.5*(1+7%)/75)+7%

= 10.57%

Particulars

Weight

Cost

Preferred Share

20.00%

8.38%

Equity

40.00%

10.57%

Debt

20.00%

6.27%

WACC = Cost of preferred x Weight of preferred + Cost of equity x Weight of equity + Cost of debt x Weight of debt

WACC = 20%*8.38% + 40%*10.57% + 20%*6.27%

WACC = 7.16%