Pine Tree Farms Corporation (PTFC) has a target capital structure of 20% debt, 1
ID: 2756321 • Letter: P
Question
Pine Tree Farms Corporation (PTFC) has a target capital structure of 20% debt, 10% preferred stock, and 70% common equity. Currently PTFC has a capital structure of 70% debt, 10% preferred stock, and 20% common stock. The after tax cost of debt is 4.5%. The preferred stock has a par value of $100 per share, a $5 per share dividend, and a market price of $70 per share. The common stock of PTFC trades at $97 per share and has a projected dividend (D1) of $2.60. The stock price and dividend are expected to continue to grow at 7% per year for the foreseeable future. What is PTFC’s weighted average cost of capital (WACC)?
Explanation / Answer
Cost of preferred stock = $5 / $100 = 5%
Cost of Common stock =( 2.60 /97 ) + 0.07 = 0.097 or 9.7%
Cost of debt after tax = 4.5%
PTFC’s weighted average cost of capital (WACC) = 0.7 * 0.045 + 0.1 * 0.05 + 0.2 * 0.097
= 0.0559 or 5.59%