Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, 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 10.2 percent coupon rate and another bond with an 7.8 percent rate. The firm
has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.1 percent. The common
stock has a price of $56 and an expected dividend (D₁) of $1.76 per share. The historical growth pattern (g) for dividends is as follows:
$ 1.31
T
1.45
1.60
1.76
The preferred stock is selling at $76 per share and pays a dividend of $7.20 per share. The corporate tax rate is 30 percent. The
flotation cost is 2.0 percent of the selling price for preferred stock. The optimum capital structure for the firm is 25 percent debt, 20
percent preferred stock, and 55 percent common equity in the form of retained earnings.
a. Compute the average historical growth rate. (Do not round intermediate calculations. Round your answer to the nearest whole
percent and use this value as g. Input your answer as a whole percent.)
Growth rate
%
Transcribed Image Text:b. Compute the cost of capital for the individual components in the capital structure. (Use the rounded whole percent computed in
part a for g. Do not round any other intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
Debt
Preferred stock
Common equity
Weighted Cost
%
c. 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.)
Debt
Preferred stock
Common equity
Weighted average cost of capital
Weighted Cost
%
%
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