Shoobee, Inc. has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average of capital. The WACC it to be measured by using the following weights: 50% long term, 10% preferred stock, and 40% common stock equity (retained earnings, new common stock issuance, or both). The firm tax is 25%. Debt: The firm can sell for P980, a 10-year, P1,000 par value bond paying annual interest at 13% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of P20 per bond. Preferred stock: 8 percent (annual dividend) preferred stock having a par value of P100 can be sold for P65. An additional fee of P2.00 per share must be paid to the underwriters. Common stock: The firm’s common stock is currently selling for P50 per share. The recent dividend paid was P4.00 per share. Its dividend payments which have approximately 60% of earnings per share in each past 6 years follows: Year Dividend 2021 P4.00 2020 3.75 2019 3.50 2018 3.30 2017 3.15 2016 2.85 It is expected that to attract buyers, new common stock must be under-priced P5 per share, and the firm must also pay P3 per share in flotation costs. Dividend payments are expected to continue at 60% earnings. Required: Compute for the weighted average cost of capital, assuming: a. Retained earnings is sufficient to finance the equity portion
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Shoobee, Inc. has asked its
50% long term, 10%
Debt: The firm can sell for P980, a 10-year, P1,000 par
Preferred stock: 8 percent (annual dividend) preferred stock having a par value of P100 can be sold for P65. An additional fee of P2.00 per share must be paid to the underwriters.
Common stock: The firm’s common stock is currently selling for P50 per share. The recent dividend paid was P4.00 per share. Its dividend payments which have approximately 60% of earnings per share in each past 6 years follows:
| Year | Dividend |
| 2021 | P4.00 |
| 2020 | 3.75 |
| 2019 | 3.50 |
| 2018 | 3.30 |
| 2017 | 3.15 |
| 2016 | 2.85 |
It is expected that to attract buyers, new common stock must be under-priced P5 per share, and the firm must also pay P3 per share in flotation costs. Dividend payments are expected to continue at 60% earnings.
Required: Compute for the weighted average cost of capital, assuming:
a. Retained earnings is sufficient to finance the equity portion
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