Mathematics, 26.10.2021 21:30 mchillery1028

Company X has the following capital structure, which it considers to be optimal: Debt =33%, Preferred stock = 28%, Common equity = 39%

Company X’s tax rate is 25% and investors expect earnings and dividends to grow at a constant rate of 6.5% in the future. Company X is expected to pay a dividend of $4.40 per share next year, and its stock currently sells at a price of $55 per share.

Company X can obtain new capital in the following ways:

Preferred: New preferred stock with a dividend of $13 can be sold to the public at a price of $109 per share.
Debt: Debt can be sold at an interest rate of 11%.

Calculate the following:

a. Cost of Common equity?

b. Cost of Preferred Equity?

c. Cost of debt?

d. Weighted Average Cost of Capital (WACC)

Answers: 3

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Company X has the following capital structure, which it considers to be optimal: Debt =33%, Prefer...

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