Berjaya Enterprises is
interested in measuring its overall cost of capital. Current investigation has
gathered the following data. The firm is in the 40% tax bracket.
Debt :
The firm can raise
debt by selling $1,000-par-value, 8% coupon interest rate, 20-year bonds on
which annual interest payments will be made. To sell the issue, an average
discount of $30 per bond would have to be given. The firm also must pay
flotation costs of $30 per bond.
Preferred stock :
The firm can sell 8%
preferred stock at its $95-per-share par value. The cost of issuing and selling
the preferred stock is expected to be $5 per share. Preferred stock can be sold
under these terms.
Common stock
The firm’s common
stock is currently selling for $90 per share. The firm expects to pay cash
dividends of $7 per share next year. The firm’s dividends have been growing at
an annual rate of 6%, and this growth is expected to continue into the future.
The stock must be underpriced by $7 per share, and flotation costs are expected
to amount to $5 per share. The firm can sell new common stock under these
terms.
Retained earnings
When measuring
this cost, the firm does not concern itself with the tax bracket or brokerage
fees of owners. It expects to have available $100,000 of retained earnings in
the coming year; once these retained earnings are exhausted, the firm will use
new common stock as the form of common stock equity financing.
1.
Calculate the
after-tax cost of debt.
2.
Calculate the cost of
preferred stock.
3.
Calculate the cost of
common stock.
4.
Calculate the firm’s
weighted average cost of capital using the capital structure weights shown in
the following table. (Round answer to the nearest 0.1%.)
Source of capital
|
Weight
|
Long-term debt
|
30%
|
Preferred stock
|
20%
|
Common stock equity
|
50%
|
Total
|
100%
|
