Brook’s Window Shields Inc. is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Glas
Posted: Thu Apr 28, 2022 1:40 pm
Brook’s Window Shields Inc. is trying to calculate its cost of
capital for use in a capital budgeting decision. Mr. Glass, 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 7.2 percent
coupon rate and another bond with a 4.2 percent coupon rate. The
firm has been informed by its investment banker that bonds of equal
risk and credit rating are now selling to yield 8.2 percent.
The common stock has a price of $60 and an expected dividend
(D1) of $6.30 per share. The firm's historical
growth rate of earnings and dividends per share has been 10.5
percent, but security analysts on Wall Street expect this growth to
slow to 8 percent in future years.
The preferred stock is selling at $56 per share and carries a
dividend of $8.75 per share. The corporate tax rate is 40 percent.
The flotation cost is 1.8 percent of the selling price for
preferred stock. The optimum capital structure is 45 percent debt,
30 percent preferred stock, and 25 percent common equity in the
form of retained earnings.
a. Compute the cost of capital for the
individual components in the capital structure. (Do
not round intermediate calculations. Input your answers as a
percent rounded to 2 decimal places.)
b. Calculate the weighted cost of each
source of capital and the weighted average cost of
capital. (Do not round intermediate calculations.
Input your answers as a percent rounded to 2 decimal places.)
capital for use in a capital budgeting decision. Mr. Glass, 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 7.2 percent
coupon rate and another bond with a 4.2 percent coupon rate. The
firm has been informed by its investment banker that bonds of equal
risk and credit rating are now selling to yield 8.2 percent.
The common stock has a price of $60 and an expected dividend
(D1) of $6.30 per share. The firm's historical
growth rate of earnings and dividends per share has been 10.5
percent, but security analysts on Wall Street expect this growth to
slow to 8 percent in future years.
The preferred stock is selling at $56 per share and carries a
dividend of $8.75 per share. The corporate tax rate is 40 percent.
The flotation cost is 1.8 percent of the selling price for
preferred stock. The optimum capital structure is 45 percent debt,
30 percent preferred stock, and 25 percent common equity in the
form of retained earnings.
a. Compute the cost of capital for the
individual components in the capital structure. (Do
not round intermediate calculations. Input your answers as a
percent rounded to 2 decimal places.)
b. Calculate the weighted cost of each
source of capital and the weighted average cost of
capital. (Do not round intermediate calculations.
Input your answers as a percent rounded to 2 decimal places.)