Homework answers / question archive / Zayd Ali Inc (ZAI) has the following capital structure, which it considers to be optimal: Debt 30% Preferred stock 10% Common equity 60% ZAI's expected net income this year is $34,285

Zayd Ali Inc (ZAI) has the following capital structure, which it considers to be optimal: Debt 30% Preferred stock 10% Common equity 60% ZAI's expected net income this year is $34,285

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Zayd Ali Inc (ZAI) has the following capital structure, which it considers to be optimal:
Debt 30%
Preferred stock 10%
Common equity 60%

ZAI's expected net income this year is $34,285.72, its established dividend payout ratio is 30 percent, its federal-
plus-state tax rate is 34 percent, and investors expect earnings and dividends to grow at a constant rate of 9
percent in the future. ZAI paid a dividend of $3.60 per share last year, and its stock currently sells at a price of
$50 per share.
ZAI can obtain new capital in the following ways:
Preferred: New preferred stock with a dividend of $10 can be sold to the public at a price of $90 per share.
Debt: Debt can be sold at an interest rate of 11 percent.

i) Determine the cost of each capital structure component.
Calculate the weighted average cost of capital.

ii) Calculate the weighted average cost of capital.