The company estimates that it can issue debt at a rate of r d = 11%, and its tax

Question

The company estimates that it can issue debt at a rate of rd = 11%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $4 per year at $47 per share. Also, its common stock currently sells for $30 per share; the next expected dividend, D1, is $3.75; and the dividend is expected to grow at a constant rate of 5% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.

What is the cost of each of the capital components? Round your answers to two decimal places.
Cost of debt %
Cost of preferred stock %
Cost of retained earnings %

What is Adams' WACC? Round your answer to two decimal places.
%

Explanation / Answer

Hope this helps.

Cost of capital Weights assigned Weighted cost Cost of debt 11% 15% 0.99% Cost of preferred stock = Dividend/ price per share = 4 / 47 8.51% 10% 0.85% Cost of Retained earning = price at time t = 0 : Dividend / (r - growth rate ), rearraging Dividend / price = r- growth rate : 3.75 / 30 = .125 <= r - growth rate
r <= .125 - .05 = r = .075
cost of retained earning = .075 7.50% 75% 5.63% Adams WACC = kd x weight x (1-tax rate ) + kp x weight + ke x weight
where kd = cost of debt
kp = cost of preferred stock
ke = cost of common stock .11 x .15 x (1-.40) + .0851 x .10 + .0563 x .75 7.47%

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