Global Internet company is looking to expand their operations. They are evaluating their cost of capital based on various financing options. Investment bankers informed them that they can issue new debt in the form of bonds at a cost of 8%, and issue new preferred stocks for the price of $25 per share paying $2.5 dividends per share. Their common stock is currently selling for $20 per share and will pay a dividend of $1.5 per share next year. They expect a growth rate in dividends of 5% per year, and their marginal tax rate is 35%. If Global raises capital using 45% debt, 5% preferred stock, and 50% common stock what is their cost of capital?

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Asked Nov 15, 2019
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Global Internet company is looking to expand their operations. They are evaluating their cost of capital based on various financing options. Investment bankers informed them that they can issue new debt in the form of bonds at a cost of 8%, and issue new preferred stocks for the price of $25 per share paying $2.5 dividends per share. Their common stock is currently selling for $20 per share and will pay a dividend of $1.5 per share next year. They expect a growth rate in dividends of 5% per year, and their marginal tax rate is 35%.

 

If Global raises capital using 45% debt, 5% preferred stock, and 50% common stock what is their cost of capital?

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Expert Answer

Step 1

Weighted average cost of capital refers to rate that a firm pays to its security holders in order to finance its assets. We will use the following steps to determine the weighted average cost of capital.

Step 2
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Cost of debt-8% Cost of preferred stock (Dividend) Price 2.5 25-0.1

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Step 3

Given that the price of the stock is $20, next year div...

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