Question

Given the following information.

Percent of capital structure:
Debt		30	%
Preferred stock		15
Common equity		55
Additional information:
Bond coupon rate		10	%
Bond yield		8	%
Dividend, expected common		$4.00
Dividend, preferred		$11.00
Price, common		$55.00
Price, preferred		$118.00
Flotation cost, preferred		$2.80
Corporate growth rate		7	%
Corporate tax rate		35	%

Calculate the weighted average cost of capital for Genex Corporation. Line up the calculations in the order shown in Table 11-1. (Do not round your intermediate calculations and round your final answers to 2 decimal places.)

	Weighted Cost
Debt (Kd)	%
Preferred stock (Kp)
Common equity (Ke)
Weighted average cost of capital (Ka)	%

Answer 1

After-tax Cost of Debt, kd = Bond Yield * (1 - Tax Rate)
After-tax Cost of Debt, kd = 8.00% * (1 - 0.35)
After-tax Cost of Debt, kd = 5.20%

Cost of Preferred Stock, kp = Dividend, Preferred / [Price, Preferred - Flotation Cost, Preferred]
Cost of Preferred Stock, kp = $11.00 / [$118.00 - $2.80]
Cost of Preferred Stock, kp = $11.00 / $115.20
Cost of Preferred Stock, kp = 9.55%

Cost of Common Stock, ke = Dividend, Expected Common / Price, Common + Growth Rate
Cost of Common Stock, ke = $4.00 / $55.00 + 0.07
Cost of Common Stock, ke = 14.27%