Question #50875

2 Cost of Preferred Stock. Micro Spinoffs also has preferred stock outstanding. The stock

pays a dividend of $4 per share, and the stock sells for $40. What is the cost of preferred

stock?

3. Calculating WACC. Suppose Micro SpinoffsвЂ™s cost of equity is 12.5 percent. What is its

WACC if equity is 50 percent, preferred stock is 20 percent, and debt is 30 percent of total

capital?

pays a dividend of $4 per share, and the stock sells for $40. What is the cost of preferred

stock?

3. Calculating WACC. Suppose Micro SpinoffsвЂ™s cost of equity is 12.5 percent. What is its

WACC if equity is 50 percent, preferred stock is 20 percent, and debt is 30 percent of total

capital?

Expert's answer

2. D = $4 per share, P = $40.

Cost of preferred stock = D/P = 4/40 = $0.1.

3. Cost of equity is 12.5 percent, equity is 50 percent, preferred stock is 20 percent, and debt is 30 percent of total capital.

WACC = E/V*Re + D/V*Red*(1 - Tc), where:

Re = cost of equity

Rd = cost of debt

E = market value of the firm's equity

D = market value of the firm's debt

V = E + D

E/V = percentage of financing that is equity

D/V = percentage of financing that is debt

Tc = corporate tax rate

As values E and D are not provided, WACC can't be calculated.

Cost of preferred stock = D/P = 4/40 = $0.1.

3. Cost of equity is 12.5 percent, equity is 50 percent, preferred stock is 20 percent, and debt is 30 percent of total capital.

WACC = E/V*Re + D/V*Red*(1 - Tc), where:

Re = cost of equity

Rd = cost of debt

E = market value of the firm's equity

D = market value of the firm's debt

V = E + D

E/V = percentage of financing that is equity

D/V = percentage of financing that is debt

Tc = corporate tax rate

As values E and D are not provided, WACC can't be calculated.

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