Explore BrainMass

# Optimal Capital Structure: Calculate the WACC

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

Company B has a optimal capital structure with the following sources/target market ratios:

SOURCE OF CAPITAL Target Market Ratios
long term debt 30%
preferred stock 5%
commonn stock equity 65%

Debt: The firm can sell a 15 year, \$1,500 par value, 10 percent bond for \$1,300
A flotation cost of 2% of the face value would be required in addition to the
discount of \$200

Preferred Stock: The firm issues stock at \$70 per share par value. The stock will
pay a \$7.00 annual dividend. The cost of issuing and selling
the stock is \$4 per share

Common Stock: Common Stock is currently selling for \$40 per share. The
expected dividend to be paid at the end of the year is \$4.56.
The dividend 5 years ago was \$2.34 and has been growing at a
constant rate ever since. It is expected that to sell, a new
common stock issue must be underpriced at \$1.10 per share
and the firm must pay \$1.10 per share in flotation costs. The
firm has a marginal tax rate of 35%

The firm has used up all of it's retained earnings. Calculate the firm's weighted average cost of capital

#### Solution Preview

Check the attached sheet.

We have the capital structure already given in the question. What we need now to calculate the cost of debt, equity & preferred stock to arrive at WACC. In 1st part in the sheet we have calculated the before taxex cost ...

#### Solution Summary

The solution computes WACC for company B with given optimal capital structure.

\$2.19
{"ft_lang_label":"__label__en","ft_lang_prob":0.9098204,"math_prob":0.85790783,"size":1750,"snap":"2020-34-2020-40","text_gpt3_token_len":429,"char_repetition_ratio":0.1139748,"word_repetition_ratio":0.0,"special_character_ratio":0.24457143,"punctuation_ratio":0.11363637,"nsfw_num_words":0,"has_unicode_error":false,"math_prob_llama3":0.9516312,"pos_list":[0],"im_url_duplicate_count":[null],"WARC_HEADER":"{\"WARC-Type\":\"response\",\"WARC-Date\":\"2020-08-05T22:53:49Z\",\"WARC-Record-ID\":\"<urn:uuid:0cfd977f-e65f-4fea-829e-0d420c967b77>\",\"Content-Length\":\"39642\",\"Content-Type\":\"application/http; msgtype=response\",\"WARC-Warcinfo-ID\":\"<urn:uuid:c2d36147-c8aa-460a-89d0-28439edde641>\",\"WARC-Concurrent-To\":\"<urn:uuid:597ea57c-ca66-430e-a361-1d6bd81178cf>\",\"WARC-IP-Address\":\"65.39.198.123\",\"WARC-Target-URI\":\"https://brainmass.com/business/weighted-average-cost-of-capital/optimal-capital-structure-calculate-the-wacc-356157\",\"WARC-Payload-Digest\":\"sha1:RLP37EK7YXQ2FKCNL2T5AUIBUTYPRFN2\",\"WARC-Block-Digest\":\"sha1:JP6SOWZ7FDE6GKBSDW2ZNCOSJNOYI3SH\",\"WARC-Identified-Payload-Type\":\"text/html\",\"warc_filename\":\"/cc_download/warc_2020/CC-MAIN-2020-34/CC-MAIN-2020-34_segments_1596439735989.10_warc_CC-MAIN-20200805212258-20200806002258-00519.warc.gz\"}"}