Problem: Given the following information, calculate the weighted average cost of capital for:
Situation A and Situation B:
Situation A Situation B
Capital Structure
Common Stock 55% 30%
Preferred Stock 15% 15%
Debt 30% 55%
Additional information
Corporate tax rate 30% 30%
Dividend, common $2.75 $2.75
Price, common $68 $68
Dividend, preferred 10% 10%
Price, preferred $103 $103
Bond yield 11% 11%
Bond coupon rate 13% 13%
Flotation cost, preferred $4.50 $4.50
Growth rate 7.5% 7.5%
After you have calculated both weighted average cost of capital amounts, write a response that explains why the rates are different and what the advantages and disadvantages of both alternatives are.
Conclude with which capital structure you would recommend and why you selected that structure.