Weighted Average Cost of Capital (WACC) is the required
An optimal capital structure of a company is a mix of debt, equity and preferred stock which can be used to maximize the company’s stock price. Therefore, a target proportion of capital structure and cost of each financing can be used to determine the WACC of the company.
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Proportion of debt in the target capital structure “
Proportion of preferred stock in the target capital structure “
Proportion of equity in the target capital structure “
After tax cost of debt, preferred stock,
The company’s capital structure is 40% debt and 60% equity. YTM on new bonds is 5%, cost of retained earnings and new common stock is 8% and 11% respectively.
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- Divided Walls Construction (DWC) has determined that the yield to maturity (YTM) on new bonds is 5 percent, its cost of retained earnings is 8 percent, and its cost of new common stock is 11 percent. If DWC’s capital structure consists of 40% debt and 60$ common equity, what is its weighted average cost of capital (WACC) if it (a) does not have to issue new stock to raise additional funds and (b) must issue new stock to raise additional funds? DWC’s marginal tax rate is 35 percent.arrow_forwardAfter careful analysis, Dexter Brothers has determined that its optimal capital structure is composed of the sources and target market value weights shown in the following table Source of capital Target market value weight Long-term debt 20% Preferred stock 13 Common stock equity 67 Total 100% The cost of debt is estimated to be 4.8%;the cost of preferred stock is estimated to be 11.7%;the cost of retained earnings is estimated to be 15.2%;and the cost of new common stock is estimated to be 17.2%.All of these are after-tax rates. The company's debt represents 15%,the preferred stock represents 8%,and the common stock equity represents 77%of total capital on the basis of the market values of the three components. The company expects to have a significant amount of retained earnings available and does not expect to sell any new common stock. a. Calculate the weighted average cost of capital on the basis of historical market value weights.…arrow_forwardTerrell Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels: Debt/Capital Ratio Projected EPS Projected Stock Price 20% $3.15 $32.50 30 3.50 36.00 40 3.75 38.00 50 3.55 32.00 Assuming that the firm uses only debt and common equity, what is Terrell's optimal capital structure? Choose from the options provided above. Round your answers to two decimal places. % debt % equity At what debt-to-capital ratio is the company's WACC minimized? Choose from the options provided above. Round your answer to two decimal places. %arrow_forward
- To assist with evaluating potential capital projects, Carrium Insights Inc. is seeking to determine its actual Weighted Average Cost of Capital (WACC). Utilising information from the financial statements, together with current information, the Finance Manager has compiled the following information as it pertains to the company’s capital structure: Debt: Bonds outstanding has a face value of $568,000,currently selling at 95% of par. These bonds have 20 years left to maturityandacoupon rate of 7.55%.(Hint: you can use the lowest multiple of $1,000 for the YTM calculation only) Common stock: 21,000 shares of common stock outstanding with a market price of $63.00.The company just paida dividend of $6.00; for ease of computation, dividends are expected to grow by 5% annually. Preferred stock:The company intends to offer 15,000 shares of preferred stock to the public at a price of $25.00 per share. The intention is to pay an annual dividend of $3.00. Additional Information: ✓The Company’s…arrow_forwardTerrell Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels: Projected EPS Projected Stock Price $3.10 $32.75 3.55 36.25 3.85 35.75 3.60 33.00 Assuming that the firm uses only debt and common equity, what is Terrell's optimal capital structure? Choose from the options provided above. Round your answers to two decimal places. Debt/Capital Ratio 20% 30 40 50 % debt % equity At what debt-to-capital ratio is the company's WACC minimized? Choose from the options provided above. Round your answer to % wo decimal places.arrow_forwardTerrell Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels: Projected EPS Projected Stock Price $32.25 $3.10 3.45 37.25 3.80 36.25 3.60 33.50 Assuming that the firm uses only debt and common equity, what is Terrell's optimal capital structure? Choose from the options provided above. Round your answers to two decimal places. % debt % equity At what debt-to-capital ratio is the company's WACC minimized? Choose from the options provided above. Round your answer to two decimal places. Debt/Capital Ratio 20% 30 40 50 %arrow_forward
- The calculation of WACC involves calculating the weighted average of the required rates of return on debt, preferred stock, and common equity, where the weights equal the percentage of each type of financing in the firm’s overall capital structure. is the symbol that represents the before-tax cost of debt in the weighted average cost of capital (WACC) equation. Wyle Co. has $1.4 million of debt, $2.5 million of preferred stock, and $3.3 million of common equity. What would be its weight on debt? 0.28 0.32 0.19 0.46arrow_forwardThe calculation of WACC involves calculating the weighted average of the required rates of return on debt, preferred stock, and common equity, where the weights equal the percentage of each type of financing in the firm’s overall capital structure. (rs, rd, rp, re) is the symbol that represents the cost of raising capital by issuing new stock in the weighted average cost of capital (WACC) equation. Avery Co. has $2.7 million of debt, $1.5 million of preferred stock, and $2.2 million of common equity. What would be its weight on preferred stock? 0.23 0.21 0.42 0.18arrow_forward11-17. Divided Walls Construction (DWC) has determined the yield to maturity (YTM) on new bonds is 5 percent, its cost of retained earnings is 8 percent, and its cost of new common stock is 11 percent. If DWC’s capital structure consists of 40 percent debt and 60 percent common equity, what is its weighted average cost of capital (WACC) if it does not have to issue new stock to raise additional funds and must issue new stock to raise additional funds? DWC’s marginal tax rate is 35 percent.arrow_forward
- General Talc Mines has compiled the following data regarding the market value and cost of the specific sources of capital. Source of Capital Before-Tax Cost Long-term debt 8% Common stock equity 19 Market price per share of common stock $50 (7,200 shares outstanding) Market value of long-term debt is $980 per bond (150 bonds issued at $1,000 par) Tax rate is 20%. What is the weighted average cost of capital using market value weights?arrow_forwardEBOOK Terrell Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels: Projected EPS Debt/Capital Ratio 20% 30 40 50 Projected Stock Price $3.30 $32.00 3.55 38.00 3.70 35.50 3.55 34.00 Assuming that the firm uses only debt and common equity, what is Terrell's optimal capital structure? Choose from the options provided above. Round your answers to two decimal places. % debt % equity At what debt-to-capital ratio is the company's WACC minimized? Choose from the options provided above. Round your answer to two decimal places.arrow_forwardRound Hammer is comparing two different capital structures: An all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 170,000 shares of stock outstanding. Under Plan II, there would be 120,000 shares of stock outstanding and $2.4 million in debt outstanding. The interest rate on the debt is 7 percent, and there are no taxes. a. If EBIT is $450,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. If EBIT is $700,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) c. What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) a. Plan I EPS Plan II EPS b. Plan I EPS Plan II EPS c. Break-even EBITarrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT