Task1. Brook’s Window Shields, Inc., is trying to compute its cost of capital for use in a capital budgeting decision. Mr. Glass, the vice-president of finance, has given you the following detailed information and has asked you to evaluate the weighted average cost of capital.
The company currently has outstanding a bond with the 10.0 percent coupon rate and any other bond with a 7.0 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit ratings are now selling to yield 11.0 percent.
The common stock has a price of $96 and an expected dividend (D1) of $4.40 per share. The firm’s historical growth rate of earnings and dividends each share has been 12.0 percent, however security analysts on Wall Street anticipates this growth to slow to 11 percent in the upcoming years.
The preferred stock is selling at $92 per share and carries a dividend of $6.60 per share. The corporate tax rate is 40 percent. The flotation cost is 2.2 percent of the selling price for preferred stock. The optimum capital structure is 35 percent debt, 20 percent preferred stock, and 45 percent common equity in the form of retained earnings.
problem1. Compute the cost of capital for individual components in capital structure.
problem2. Compute the weighted average cost of capital.