Question

The company Davis Travel want to know their WACC and to use it for their projects. The following data has to be used to calculate WACC. 20 year bond paying the market rate or Cost of Debt Corporate taxes Preferred stock share par value Preferred stock share market value issuance cost per one preferred share Preferred dividends Common stock share par value Common stock share market value Issuance cost per common stock share is 10% of par value price 19.5 15 % 90 95 92 | 10 Common share dividends last vear | 5 % Constant dividends payment rate (g) on common stock share Capital structure ( 000) Bonds Preferred stock Common stock 2000 1500 3700

Answer 1

Cost of debt = Interest rate(1-tax rate)

=10%(1-0.15)

=10%(0.85)

=8.5%

Cost of preference stock = Dividend/current market price - insurance cost

=7/90-3

=7/87

=8.046%

Cost of equity = D1/(po-insurance cost) + growth rate

D1 = dividend of next year = dividend of current year(1+ growth rate)

=10(1+0.05)

=10(1.05)

=10.5

po= Price of share today = 92

Ke = cost of equity = 10.5/(92 -9.5) + 5%

=10.5/(82.5)+5%

=12.7273%+5%

=17.7273%

Statement showing WACC

Source of capital	Amount	Weight	K	WACC = weight*k
Bonds	2000	27.78%	8.50%	2.36%
Prefered stock	1500	20.83%	8.05%	1.68%
common stock	3700	51.39%	17.73%	9.11%
	7200			13.15%

Thus WACC = 13.15%