Milner Sisters has 25,000 shares of common stock outstanding at a market price o
ID: 2720401 • Letter: M
Question
Milner Sisters has 25,000 shares of common stock outstanding at a market price of $48 a share. The common stock just paid a $2.20 annual dividend and has a growth rate of 2.5 percent. There are 12,000 shares of 6 percent preferred stock outstanding at a market price of $62 a share. The outstanding bonds mature in 13 years, have a total face value of $750,000, a face value per bond of $1,000, and a market price of $1,011.92 each. The bonds pay 7 percent interest, semiannually. The tax rate is 34 percent. What is the firm’s weighted average cost of capital? Please show work:
a. 7.13%
b. 7.39%
c. 7.44%
d. 7.82%
e. 7.91%
Explanation / Answer
Weightage
Cost
WACC
25000
48
1200000
0.44396102
0.070833
0.031447
12000
62
744000
0.275255833
0.06
0.016515
750
1011.92
758940
0.280783147
0.0945
0.026534
2702940
1
0.074496
Cost of common stock
0.045833333
2.2/48
0.025
plus growth
0.070833333
expected return
48.00034909
Cost of bond
(note rate of interest 7% is not for the year but for the six month)
(1.0462)2-1 =
0.0945
.07(1-.34)=
0.0462
0.0231
Weightage
Cost
WACC
25000
48
1200000
0.44396102
0.070833
0.031447
12000
62
744000
0.275255833
0.06
0.016515
750
1011.92
758940
0.280783147
0.0945
0.026534
2702940
1
0.074496
Cost of common stock
0.045833333
2.2/48
0.025
plus growth
0.070833333
expected return
48.00034909
Cost of bond
(note rate of interest 7% is not for the year but for the six month)
(1.0462)2-1 =
0.0945
.07(1-.34)=
0.0462
0.0231