Market prices are $1,035 for bonds, $19. for preferred stock, and $35. for commo

Question

Market prices are $1,035 for bonds, $19. for preferred stock, and $35. for common stock. There will be sufficient internal common equity funding(i.e., retained earnings) available such that the firm does not plan to issue new common stock. Calculate the firms weighted average cost of capital.
Type of financing % of future financing
bonds(8%,$1,000 par, 16 yr. maturity) 38%
preferred stock(5,000 shares outstanding,
$50 par, $1.50 dividend) 15%
Common equity 47%
Total 100%

Explanation / Answer

LET COST OF BONDS BE Kd. So, 1035 = ((1000*0.08)*((1+Kd)^16-1)/(Kd(1+Kd)^16)) +1000/(1+Kd)^16 => Kd = 0.08 = 8% Cost of preferred stock, Kp = D1/P = 1.50/19 = 0.079 = 7.9% Cost of common equity = 0 as no dividends are indicated. WACC = We*Ke + Wp*Kp + Wd*Kd => = 0 + 0.15*7.9+ 0.38*8 => = 4.225 % = say 4.23% (ANSWER)

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