You have been asked to estimate the weighted average cost of capital (WACC) for Jake Corp., a medium-sized boat manufacturer in Bequia. You have been provided with the following information.
1. Common Shares — the current market price of Pappy’s 50,000 common shares on the OECS stock exchange is $4 per share. Pappy paid a dividend of $1.00 per share last year and investment analysts have indicated that the dividends should grow at an average annual rate of 12% for the foreseeable future.
2. Preferred Shares — Pappy also has 250,000 preferred shares that carry a stated dividend of $0.25 per share and have a current market price of $4 per share.
3. Pappy has 1,500 $1,000 face value bonds outstanding that carry a 12% coupon rate. The Yield to Maturity is 10%. The bonds will mature in 25 years. Bond’s interest is paid semiannually.
Pappy’s tax rate is 35%.
Required
Calculate Pappy’s cost of equity
Calculate Pappy’s cost of debt
Calculate Pappy’s cost of preferred shares
Calculate Pappy’s weighted average cost of capital.