Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Textbook Question
Chapter 9, Problem 9.15P
WACC and target weights After careful analysis, Dexter Brothers has determined that its optimal capital structure is composed of the sources and target market value weights shown in the following table.
| Source of capital | Target market value weight |
| Long-term debt | 30% |
| 15 | |
| Common stock equity | 55 |
| Total | 100% |
The cost of debt is 4.2%, the cost of preferred stock is 9.5%, the cost of retained earnings is 13.0%, and the cost of new common stock is 15.0%. All are after-tax rates. The company’s debt represents 25%, the preferred stock represents 10%, and the common stock equity represents 65% of total capital on the basis of the current market values of the three components. The company expects to have a significant amount of retained earnings available and does not expect to set any new common stock.
- a. Calculate the WACC on the basis of historical market value weights.
- b. Calculate the WACC on the basis of target market value weights.
- c. Compare the answers obtained in parts a and b. Explain the differences.
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After careful analysis, Dexter Brothers has determined that its optimal capital structure is composed of the sources and target market value weights shown in the following table
Source of capital
Target market
value weight
Long-term debt
20%
Preferred stock
13
Common stock equity
67
Total
100%
The cost of debt is estimated to be 4.8%;the cost of preferred stock is estimated to be 11.7%;the cost of retained earnings is estimated to be 15.2%;and the cost of new common stock is estimated to be 17.2%.All of these are after-tax rates. The company's debt represents 15%,the preferred stock represents 8%,and the common stock equity represents 77%of total capital on the basis of the market values of the three components. The company expects to have a significant amount of retained earnings available and does not expect to sell any new common stock.
a. Calculate the weighted average cost of capital on the basis of historical market value weights.…
WACC and target weights After careful analysis, Dexter Brothers has determined that its optimal capital structure is composed of the sources and target market value weights shown in the following table. Source of capital Target market value weight Long-term debt 30% Preferred stock 15 Common stock equity 55 Total 100% The cost of debt is 4.2%, the cost of preferred stock is 9.5%, the cost of retained earnings is 13.0%, and the cost of new common stock is 15.0%. All are after-tax rates. The company's debt represents 25%, the preferred stock represents 10%, and the common stock equity represents 65% of total capital on the basis of the current market values of the three components. The company expects to have a significant amount of retained earnings available and does not expect to sell any new common stock. Calculate the WACC on the basis of historical market value weights. Calculate the WACC on the basis of target market value weights. Compare the answers obtained in parts a and b.…
Weighted Average Cost of CapitalGardner, Inc., plans to finance its expansion by raising the needed investment capital from the following sources in the indicated proportions and respective capital cost rates:
Capital Cost
Source
Proportion
Rate
Bonds
40%
12%
Preferred stock
20%
8%
Common stock
30%
11%
Retained earnings
10%
8%
100%
Calculate the weighted average cost of capital.Round answers to one decimal place. For example, 0.457 = 45.7%.
Weighted Average
Cost of Capital
Bonds
Answer
Preferred stock
Answer
Common stock
Answer
Retained earnings
Answer
Answer
Chapter 9 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 9.1 - What is the cost of capital?Ch. 9.1 - Prob. 9.2RQCh. 9.1 - Prob. 9.3RQCh. 9.1 - What are the typical sources of long-term capital...Ch. 9.2 - Prob. 9.5RQCh. 9.2 - Prob. 9.6RQCh. 9.2 - Prob. 9.7RQCh. 9.3 - How would you calculate the cost of preferred...Ch. 9.4 - What premise about share value underlies the...Ch. 9.4 - How do the constant-growth valuation model and...
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