Cost of capital
Your task is to find the cost of capital (WACC) for a company. The company has three sources of capital available. The marginal tax rate for the company is 30%.
Debt: 2000 coupon bonds with 3% annual coupon outstanding. With $1000 par value and currently trading at 90% of the par, bonds currently offer 5% yield to bondholders.
Preferred Stock: 15000 shares outstanding with $90 Market price and 6% yield.
Common stock : 100000 shares outstanding with the book value of $ 15 but currently trading at P/B =2.0. one may apply CAPM to estimate the cost equity. Input for estimations are risk free rate 3%, market risk premium 6% and the stock beta is 1.20.
Find the cost of each financing source, capital structure weight of each source and the WACC.