Question

Hel Given the following information: Percent of capital structure: Preferred #toek Comnon equity (retained earnings) Debt 358 45 20 eBook Adltionalinformation: Corporate tax rate Dividend, preferred Dividend, expected common $ 3.50 Price, preferzed Growth rate Bond yield rlotation coat, preterred 4.50 Price, common $ 8.00 $110.00 6 85.00 Calculate the weighted average cost of capital for Digital Processing Inc. (Do not round intermediate ca answers as a percent rounded to 2 decimal places) intermediate calculations. Input your Weighted Cost Debt Preferred stock Common equity (retained earnings) Weighted average cost of capital く Prey 5015 Ⅲ Next >

Answer 1

A	B	C	D	E	F	G	H	I	J
2
3		Formula for WACC is given as:
4		WACC = r(E) × w(E) + r(P) × w(P)+r(D) × (1 – t) × w(D)
5		Where, r(E), r(P) and r(D) are cost of equity, preferred stock and cost of debt, w(E), w(P) and W(D)
6		are weight of equity, preferred stock and debt and t is the tax rate
7		Calculation of cost of debt:
8		Cost of debt will be the yield to maturity of the bond can be calculated as follows:
9
10		Yield to maturity of the bond	6.00%
11
12		Hence Cost of debt is	6.00%
13
14		Calculation of cost of common equity using dividend growth:
15
16		As per dividend growth model, Price of share is the present value of all future dividends discounted at cost of equity.
17		Current Price of Share (P)	=Div1)/(r-g)
18		Where Div1 is the dividend paid next year, r is cost of equity and g is perpetual growth rate of dividend.
19
20		Cost of equity can be calculated as below:
21		Cost of equity, r(E) = (Div1/P)+g
22
23		Given the following data:
24		Dividend (Div1)	$3.50
25		Price (P)	$85
26		Growth rate (g)	6.0%
27
28		From Dividend growth model,
29		Cost of equity, r(E) = (Div1/P)+g
30		Cost of equity=	10.12%	=(D24/D25)+D26
31
32		Hence cost of using dividend growth model is	10.12%
33
34		Calculation of Cost of preferred stock and market value of preferred stock:
35
36		Annual Dividend of preferred stock	$8.00
37		Current Price	$110.00
38		Floatation cost (F)	$4.50
39		Cost of preferred stock	=Preferred Dividend/(Current Price - Preferred Stock)
40			7.58%	=D36/(D37-D38)
41
42		Hence cost of Preferred Stock is	7.58%
43
44		Calculation of Weighted Cost
45
46		Tax Rate	30%
47
48		Source of capital	Capital Structure	Cost	Weighted Cost
49		Debt	20.00%	6.00%	0.84%	=E49*(1-D46)*D49
50		Common Stock	45.00%	10.12%	4.55%	=E50*D50
51		Preferred Stock	35.00%	7.58%	2.65%	=E51*D51
52		WACC			8.05%	=SUM(F49:F51)
53