Welltodo Ltd has the following capital structure, which it considers to be optimal: debt = 15%, preferred stock = 20%, and common stock = 65%. FCI's tax rate is 40%, and investors expect earnings and dividends to grow at a constant rate of 6% in the future. Welltodo paid a dividend of GHC4.70 per share last year (Do), and its stock currently sells at a price of GhC60 per share. Ten-year Treasury bonds yield 6%, the market risk premium is 5%, and Welltodo's beta is 1.3. The following terms would apply to new security offerings. Preferred: New preferred could be sold to the public at a price of GhC100 per share, with a dividend of GhC9. Flotation costs of GhC5 per share would be incurred. Debt: Debt could be sold at an interest rate of 9%. Common: New common equity will be raised only by retaining earnings. Determine the company's WACC? %3D
Welltodo Ltd has the following capital structure, which it considers to be optimal: debt = 15%, preferred stock = 20%, and common stock = 65%. FCI's tax rate is 40%, and investors expect earnings and dividends to grow at a constant rate of 6% in the future. Welltodo paid a dividend of GHC4.70 per share last year (Do), and its stock currently sells at a price of GhC60 per share. Ten-year Treasury bonds yield 6%, the market risk premium is 5%, and Welltodo's beta is 1.3. The following terms would apply to new security offerings. Preferred: New preferred could be sold to the public at a price of GhC100 per share, with a dividend of GhC9. Flotation costs of GhC5 per share would be incurred. Debt: Debt could be sold at an interest rate of 9%. Common: New common equity will be raised only by retaining earnings. Determine the company's WACC? %3D
Chapter12: The Cost Of Capital
Section: Chapter Questions
Problem 14P
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Transcribed Image Text:a. Welltodo Ltd has the following capital structure, which it considers to be optimal: debt =
15%, preferred stock = 20%, and common stock = 65%. FCI's tax rate is 40%, and
investors expect earnings and dividends to grow at a constant rate of 6% in the future.
Welltodo paid a dividend of GhC4.70 per share last year (Do), and its stock currently sells
at a price of GhC60 per share. Ten-year Treasury bonds yield 6%, the market risk premium
is 5%, and Welltodo's beta is 1.3. The following terms would apply to new security
offerings. Preferred: New preferred could be sold to the public at a price of Gh¢100 per
share, with a dividend of GhC9. Flotation costs of Gh¢5 per share would be incurred.
Debt: Debt could be sold at an interest rate of 9%. Common: New common equity will be
raised only by retaining earnings.
Determine the company's WACC?
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