Please calculate the company’s WACC (Weighted Average Cost of Capital) by first reading the following scenario and completing parts a- d which follow:
The Bradbury Breathe Easy Company needs to raise additional funds to build the new air purification systems factory. Their corporate bylaws suggest a mix of 50% debt, 5% preferred stock and 45% common stock. The company is in the 35% tax bracket.
1. The company can issue $1,000 bonds at 10%, although the current market is paying 11%. As a result, The company will need to sell the bonds at a discount of $975. (assume the unlikely scenario that Bradbury Wealth Management will underwrite these bonds for nothing). What is the firm’s AFTER TAX cost to issue these bonds? (Hint: YTM = going market rate)
2. The company can issue preferred shares of stock at $90 per share and pay an 8% dividend. The stock brokerage firm will charge $5 per share to issue the stock. Please calculate the cost of issuing preferred shares?
3.. Finally, the company can issue common stock at $75 per share. The dividend has grown consistently for the past ten years at 7%. Next year they expect to issue a dividend of $7.50. What is the cost of common stock?
4. Calculate the weighted average cost of capital for Bradbury Breathe Easy Company (using the target capital structure weights aforementioned for debt, preferred stock and common equity.
This is my 3rd time that i am posting this question.please accurate answer and explaination if could
| Particular | % | Tax @35% | After tax rate |
| debt, | 11% | 3.85% | 7.2% |
| preferred stock | 8% | 8% | |
| common stock. | 7% | 7% |
. What is the firm’s AFTER TAX cost to issue these bonds? (Hint: YTM = going market rate)
| Particular | After tax rate |
| debt, | 7.20% |
The company can issue preferred shares of stock at $90 per share and pay an 8% dividend. The stock brokerage firm will charge $5 per share to issue the stock. Please calculate the cost of issuing preferred shares
Cost of issue
preferred shares $90 per share and issue X no. of share
so cost of iisuance is = $5*x
the company can issue common stock at $75 per share. The dividend has grown consistently for the past ten years at 7%. Next year they expect to issue a dividend of $7.50.
The cost of common stock is as follow
common stock = $75 per share
g= 7%.
D1 = $7.50
Cost of Equity = Next year’s Annual Dividend / Current stock Price) + Dividend Growth Rate
=7.5 /75 + 0.07
=0.10+0.07
=0.17 = 17%
WACC = 11.65%
Calculation of WACC
| Particular | Cost | Portion in capital | WACC | |
| debt, | 7.20% | 50% | 0.036 | 3.60% |
| preferred stock | 8% | 5% | 0.004 | 0.40% |
| common stock. | 17% | 45% | 0.0765 | 7.65% |
| 11.65% |
