/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q22BP Question: Given the following in... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 4: Q22BP (page 367)

Question: Given the following information, calculate the weighted average cost of capital for Hamilton Corp. Line up the calculations in the order shown in Table 11-1. Percent of capital structure:

Debt

35%

Preferred stock

20

Common equity

45

Additional information:

Bond coupon rate

11%

Bond yield to maturity

9%

Dividend, expected common

\(5

Dividend, preferred

\)12

Price, common

\(60

Price, preferred

\)106

Flotation cost, preferred

$4.50

Growth rate

6%

Corporate tax rate

35%

Short Answer

Expert verified

Answer

The weighted average cost of capital is10.86%.

Step by step solution

01

Definition of Capital Structure

Capital structure can be defined as the proportion of the debt and equity elements present in the capital of the business entity. The business entity uses the debt-to-equity ratio to determine the risk associated with capital borrowings.

02

Calculation of weighted average cost of capital

Particular

Cost of capital

Weightage in capital structure

Weighted cost

Debt

5.85%

35%

2.05%

Preferred stock

11.82%

20%

2.36

Common equity

14.33%

45%

6.45

Total

10.86%

Working note: Calculation of cost of capital

1. Calculation of cost of debt after tax:

Kd=Y(1-T)=9%(1-0.35)=5.85%

2. Calculation of cost of preferred stock:

KP=DPPp-F=$12$106-$4.50=$12$101.5=11.82%

3. Calculation of cost of common stock:

Ke=CurrentdividendMarketprice+Growthrate=$5$60+6%=14.33%

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Look at Table 10-1 again, and now assume interest rates in the market (yield to maturity) increase from 9 to 12 percent.

a. What is the bond price at 9 percent?

b. What is the bond price at 12 percent?

c. What would be your percentage return on the investment if you bought when rates were 9 percent and sold when rates were 12 percent?

The Caffeine Coffee Company uses the modified internal rate of return. The firm has a cost of capital of 11 percent. The project being analyzed is as follows (\(26,000 investment):

Year

Cash flow

1

\)12,000

2

11,000

3

9,000

a. What is the modified internal rate of return? An approximation from Appendix B is adequate. (You do not need to interpolate.)

b. Assume the traditional internal rate of return on the investment is 17.5 percent. Explain why your answer in part a would be lower.

Assume a \(90,000 investment and the following cash flows for two alternatives:

Year

Investment A

Investment B

1

\)25,000

\(40,000

2

30,000

40,000

3

25,000

28,000

4

19,000

--

5

25,000

--

a. Calculate the payback for investments A and B.

b. If the inflow in the fifth year for Investment A was \)25,000,000 instead of $25,000, would your answer change under the payback method?

King鈥檚 Department Store is contemplating the purchase of a new machine for \(22,802. The machine will provide \)3,500 per year in cash flow for nine years. King鈥檚 has a cost of capital of 10 percent. Using the internal rate of return method, evaluate this project and indicate whether it should be undertaken.

Wilson Oil Company issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 15 percent. This return was in line with the required returns by bondholders at that point in time as described next:

Real rate of return ........................ 8%

Inflation premium ......................... 3

Risk premium .............................. 4

Total return ............................... 15%

Assume that 10 years later, due to bad publicity, the risk premium is now 7 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 15 years remaining until maturity. Compute the new price of the bond.
See all solutions

Recommended explanations on Business Studies Textbooks

Organizational Communication

Read Explanation

Sales in Business

Read Explanation

Managers

Read Explanation

Corporate Finance

Read Explanation

Public Relations Business Studies

Read Explanation

Intermediate Accounting

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.