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Kindly assist how to calculate this. its a bit confusing me.
A company has the following capital structure: Debt 20%, Preference 28% and Equity 52%. Expected net income this year is $34,285.72 dividend payout ratio is 30% future earnings and dividends to grow at a constant rate of 9%. The co. paid a dividend of $3.6/share last year and its stock currently sells for $54/share. The Co.can obtain new capital in the following ways. i) A perpetual preference stock with an $10 dividend . currently selling for $90 but floatation cost will be 7% of mkt price.ii) Debt can be sold at 15%. (a)Determine the cost of each capital component (b) calculate WACC.
I do not know where you found this question, but for various reasons it could not possibly be asked in Paper F9!!
For the cost of equity you use the growth model formula. We know the current dividend, the market value, and the growth rate,
For the cost of preference shares – the have fixed dividend and so it is the growth model formula again, but with g = 0.
For debt – ‘debt can be sold at 15%’ does not mean anything at all 🙂
The WACC is as usual, weighted the individual costs by the total market value of each.
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