(Please, use these formulas that are in the image only). A company’s capital structure consists solely of debt and common equity. It can issue debt at 15 percent interest rate, and its common stock is expected to pay a $5 dividend per share next year. The stock’s price is currently $40, its dividend is expected to grow at a constant rate of 3 percent per year; its tax rate is 30 percent and its weighted average cost of capital (WACC) is 14 percent. 1. Calculate the after-tax cost of debt and the cost of common equity. 2. What percentage of the company’s capital structure consists of common equity? 1-dividend growth model:D1RE =PoD1 = expected dividend paymentPo = current priceg = constant divident growth rateRE = cost of equity2-CAPM equation:RE = Rp + BE (E(RM) – RF)Rg: The cost of equityR: risk-free rate: the yield on newly issued Treasury bonds.fB: beta coefficientE(R ): the expected market return.E(R ) -R: the expected market risk premium.m3-Approximating the costPV –.I +– NanraNa + PVIFannual interest in dollars.PV=Par Value.Na= net proceeds from the sale of debt (bond).n = number of years to the bond's maturity.4-The after-tax cost of debtThe after-tax cost of debt, r¡, can be found by multiplying the before-taxcost, r a by 1 minus the tax rate, T, as stated in the following equation:ri = ra x (1 – T)5-the cost of preferred stockP = D/RR = D/PP Weighted Average Cost of Capital- WACCNotationE = market value of equity = # of outstanding shares timesprice per shareD=market value of debt = # of outstanding bonds times bondpriceP= market value of Preferred stock = # of outstandingpreferred shares times price per preferred shareV= market value of the firm = D +E+PWeightsW = E/V=percent financed with equityEW_ =D/V=percent financed with debtw = P/V = percent financed with preferred stockWACC = w x R_ +w_ xr+w × RE E D ĭ P P

Here, Cost of debt (rd) is 15% Expected Dividend (D1)is $5 Stock Price (P0)is $40 Growth Rate (g) is…

A company’s capital structure consists solely of debt and common equity. It can issue debt at 15 percent interest rate, and its common stock is expected to pay a $5 dividend per share next year. The stock’s price is currently $40, its dividend is expected to grow at a constant rate of 3 percent per year; its tax rate is 30 percent and its weighted average cost of capital (WACC) is 14 percent. 1. Calculate the after-tax cost of debt and the cost of common equity. 2. What percentage of the company’s capital structure consists of common equity?

A company’s capital structure consists solely of debt and common equity. It can issue debt at 15 percent interest rate, and its common stock is expected to pay a $5 dividend per share next year. The stock’s price is currently $40, its dividend is expected to grow at a constant rate of 3 percent per year; its tax rate is 30 percent and its weighted average cost of capital (WACC) is 14 percent. 1. Calculate the after-tax cost of debt and the cost of common equity. 2. What percentage of the company’s capital structure consists of common equity?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 5MC

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