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.)

Debt:

Perferred Stock:

Common equity:

Weighted average cost of capital:

Solution

Cost of equity = (Dividend expected /Price of the stock) + Growth rate

Cost of equity = (2.5 /75) + 7%

Cost of equity = 10.333333%

Cost of preferred = Dividend of preferred /(Price of preferred - Flotation cost of preference)

Cost of preferred = 8.5 /(105 - 3.6)

Cost of preferred = 8.382643%

Cost of debt = Bond yield = 9.5%

WACC = Weight of equity x Cost of equity + Weight of preference x Cost of preferred + Weight of debt x Cost of debt x (1-Tax)

WACC = 40% x 10.333333% + 20% x 8.382643% + 40% x 9.5% x (1-34%)

WACC = 8.317862% or 8.32%