# FINANCE-Homework Problem Cost of Capital The following balance sheet reflects market values

Homework ProblemCost of CapitalThe following balance sheet reflects market values of the target proportions of Firm A’s capitalstructure.Assets \$256,334Debt\$ 87,154Pref Stk\$ 25,633Com. Stk\$143,547Firm A plans to finance the planned projects from the following sources:Debt: Existing bonds of similar risk and maturity have an annual coupon of 6.5 percent, paidsemiannually, mature in 10 years, and currently sell for \$987.45. The firm’s marginal tax rate is34%.Preferred Stock: The firm plans to issue 10% preferred stock with a par value of \$30. Theshares are expected to sell for \$40.Common Stock: The firm will issue new shares to provide the common stock portion offinancing. The most recent dividend, D0 was \$2.85 and that dividend is expected to grow at 2.5percent per year. The current share price is \$45.80. (Hint: Use the dividend discount model (p.10 in the PP slides) to estimate the cost of common stock. D1 = D0(1 + g)).Using this information, estimate Firm A’s weighted average cost of capital. Show allcalculations for the weights, the component costs of capital, and the WACC (interim results forcomponent costs in percent to three decimal places and cost of capital to two decimal places,(e.g. KP = 6.352%, WACC = 8.25%) . For the cost of debt, list all the keystrokes and valuesinput to the financial calculator, e.g. PV = xxxx, PMT = yyy, etc. Do all calculations on thissheet in pencil.Check Answers: WD = 0.34, WP = 0.10, WE = 0.56, KD = 6.660%, KP = 7.500%, KE = 8.878%WACC = 7.22%

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