09 May DETERMINE THE WEIGHTED AVERAGE COSTS OF CAPITAL USING BOTH THE MARKET AND THE BOOK VALUE WEIGHTS.
Metallic Engineering Inc. a manufacturer of fabricated aluminum products for aerospace engineering automotive and custom industrial applications is calculating its WACC. The firm’scommon stock just paid a dividend of $4.5 per share and now is selling for $80. The firm’s financialstaff estimates the company’s new product will generate a dividend growth rate of 7%. Today thefirm issued 7000 bonds that will mature in 15 years with $1 000 face value. These bonds will pay a9% coupon rate quarterly and are currently selling for $970. The firm has 100K preferred shares ofstock outstanding with a book value of $45 but currently selling for $55 per share. The last preferreddividend payments were $3.5 per share. The firm’s tax rate is 40%. The firm has 200K shares ofcommon stock outstanding with the same book value as that of its preferred stock.a. Calculate the book value and market value weights for each source of capital.200K shares of common stock outstanding $4.50 dividend Share Price $80.00Dividend Growth Rate 7%Issued 7000 bonds 15 yr mature date $1000 face value 9% coupon rate quarterly currently selling $970100K preferred shares of stock outstanding book value $45 currently selling $55 preferred dividend payments $3.50Tax rate 40%b. Calculate the before-tax and after-tax component costs of capital (i.e. debt preferred equity newcommon equity)c. Determine the weighted average costs of capital using both the market and the book value weights.
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