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Safari File Edit View History Bookmarks window Help ezto.mheducation.com FINAL EXAM Given the following information: Percent of capital structure Debt Preferred stock Common equity 20% 10 70 Additional information Bond coupon rate Bond yield to maturity Dividend, expected common Dividend, preferred Price, common Price, preferred Flotation cost, preferred Growth rate Corporate tax rate 14% 12% S 2.00 S 9.00 S 45.00 S 100.00 S 7.50 9% 35% Calculate the Hamilton Corp.\'s weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate calculi Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt Preferred stock Common equity Weighted average cost of capital

Solution

Solution:

Bond Yield to Maturity = 12%

After tax cost of debt (Kd) = 12% (1-0.35) = 7.80%

Expected common dividend (D1) = $2

Price of common stock (P0) = $45

Growth rate (g) = 9%

Cost of Equity (Ke) = D1/P0 + g = 2/45 + 0.09 = 13.44%

Dividend Preferred = $9

Price preferred = $100

Flotation cost of preferred shares = $7.50

Cost of prefered share (Kp) = Dividend / Net Proceed = 9 / (100-7.50) = 9.73%

Weighted Average cost of capital (WACC) = (Kd*Wd) + (Ke*We) + (Kp*Wp)

= (7.80 * 0.20) + (13.44*0.70) + (9.73*0.10) = 11.94%