ledero, res and Ojilla aka TBO Company is planning to invest in a piece of drying equipment for their dried mango product line and needs to evaluate this using the discounted cash- flow techniques in capital budgeting, thus, they need to identify their weighted average cost of capital. The company plans to use P10Million of long-term debts, P5million of preferred stock and P15 million of common equity. Their long-term debt used to have a 15% interest rate but currently, the market requires as much as 17%. Their preferred stock is selling at P40 with P5 dividends. Their common equity is selling at P80 with 8% growth rate in dividends. Furthermore, they are planning to issue P6 dividend per stock at the end of the year. Both preferred stocks and common stocks have a flotation cost of 10%. Their income tax rate is 30% Compute for the company's WACC?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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