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AZ Products has 140,000 shares of common stock outstanding at a market price of $27 a share
AZ Products has 140,000 shares of common stock outstanding at a market price of $27 a share. Next year's annual dividend is expected to be $1.43 a share and the dividend growth rate is 2 percent. The company also has 2,500 bonds outstanding with a face value of $1,000 per bond. The bonds have a pretax yield of 7.35 percent and sell at 98.2 percent of face value. The company's tax rate is 21 percent. What is the weighted average cost of capital?
Expert Solution
Total value of:
Common stock=140,000*27=$3,780,000
Bonds=2500*(1000*98.2%)=$2,455,000
Total value=3,780,000+2,455,000
=$6235000
Cost of common stock=(D1/Current price)+Growth rate
=(1.43/27)+0.02
=7.2962963%(Approx)
Cost of debt after-tax=yield*(1-tax rate)
=7.35*(1-0.21)
=5.8065%
WACC=Respective cost*Respective weight
=(3,780,000/6235000*7.2962963)+(2,455,000/6235000*5.8065)
=6.71%(Approx)
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