A company has the following capital structure: Target weightings: 30% debt, 20% preferred stock, 50% common equity. Tax Rate: 35%. The firm can issue $1000 face value, 7.00% semi-annual coupon debt with a 15-year maturity for a price of $1047.46. An 8.0% dividend preferred stock issue has a value of $35 per share. The company’s growth rate is estimated at 6.0%. The company’s common shares have a value of $40 and a dividend in year 0 of DO = $3.00. The company’s weighted average cost of capital is closest to:（）
A. 9.84%.
B. 9.28%.
C. 9.21%.
参考答案：A
解析：
Step 1 : Determine the after-tax cost of debt:
The after-tax cost of debt [ kd ( 1 - t) ] is used to compute the weighted average cost of capital. It is the interest rate on new debt (kd) less the tax savings due to the deductibility of interest (kdt).
Here, we are given the inputs needed to calculate kd: n = 15 × 2 = 30, PMT = (1000 × 0.07)/2 = 35, FV = 1000, PV = - 1047.46, CPT I = 3.25, multiply by 2 = 6.50%.
Thus, kd(1 -t) =6.50% × (1 -0.35) =4.22%
Step 2: Determine the cost of preferred stock:
Preferred stock is a perpetuity that pays a fixed dividend (Dps) forever. The cost of preferred stock (kps) = Dps/P
where Dps = preferred dividends. P = price.
Here, Dps =0.08 × $35.00 = $2.80, so kps =Dps/ P = $2.80/$35 =0.08, or 8.0%.
Step 3: Determine the cost of common equity:
kce = (D1/ P0) +g
where D1 = Dividend in next year
P0 = Current stock price
g = Dividend growth rate
Here, D1 =D0×(1 +g) = $3.00×( 1 +0.06) = $3.18.
k = (3.18 / 40) +0.06 =0.1395 or 13.95%.
Step 4 : Calculate WACC :
WACC = (wd) × (kd) + (wps) × (kps) + (wce) × (kce)
where wd, wps, and wce are the weights used for debt, preferred stock, and common equity.
Here, WACC = (0.30 ×4.22%) + (0.20 ×8.0%) + (0.50 ×13.95%) =9.84%.
Note: Your calculation may differ slightly, depending on whether you carry all calculations in your calculator, or round to two decimals and then calculate.
