Cost

1) Determine the weighted marginal cost of capital for the following from using constant book weights. Balance Sheet ($ millions) Assets Claims Current assets $200 current liabilities $100 Net fixed assets 400 long term debt 200 Preferred stock 100 Common equity 200 ----------- -------------- 600 600 30-year bonds sale price = $1,000 (face value), 8% coupon, 2% flotation costs. Preferred stock sale price = $30/share, $3/share annual dividend, 4% flotation costs. Common stock sale price = $10/share, 6%flotation cost. The firm’s marginal tax rate is 40%. Next year’s dividend is expected to be 75% per share and the anticipated growth rate in these dividend is 6% per year. 1) As a financial analyst for the D.Vetter supply company, you have been given the assignment of determining the company’s cost of capital. Toward that end, the following financial information has been collected Present Capital Structure -------------------------------------------------- Source of Par Total Book Value Market Value Capital ($) ($ Million) Debt 1,000 4 $1,317 per bond Preferred Stock 100 1 $ 120 per bond Common Stock 10 5 $ 22 per bond Anticipated External Financing Opportunities ------------------------------------------------------------- Source of Par Maturity Stated Capital/ Flotation Sale Price Capital ($) Dividend Rate Cost (%) Debt 1,000 30 years 7% Coupon 4 $1,000 per bond Preferred Stock 100 -------- 8% Dividend 5 100 per share Common Stock 10 -------- ---------- 10 22 per share Next year’s expected common dividend is $1.05 per Share, the anticipated growth rate in dividend is 8% per year and the firm pays out all of its earnings in dividends. The company’s marginal tax rate is 40%. a. Determine the weighted average cost of capital using book - value weights. b. Determine the weighted average cost of capital using market – value weights. c. Briefly explain why the k calculated in (b) is greater than the k calculated in (a).