Dr Nick

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    Kaplan University
    Apr-2009 - Mar-2014

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    University of Santo Tomas
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Category > Business & Finance Posted 13 Jul 2017 My Price 13.00

the Weighted Average Cost of Capital (WACC)

Bogart Gaming Company (BGC) has the following capital structure, which it considers to be optimal:  25% debt, 15% preferred stock, and 60% common stock.  BGC’s tax rate is 40%, and its investors expect dividends to grow at a constant rate of 6% in the future.  BGC paid a dividend of $3.70 last year (D0) on its common stock, and the stock is currently priced at $60 per share.

 Debt can be sold at an interest rate of 9%.

 New preferred stock could be sold to the public at a price of $100 per share with a dividend of $9, but flotation costs of $5 per share would be incurred.

 Only retained earnings will raise any new common equity.

1. Find the component costs of debt, preferred stock, and common stock.

2. What is the Weighted Average Cost of Capital (WACC)?

3. In one paragraph, explain what WACC means.  Why is it so important to estimate WACC correctly?

 

Answers

Dr Nick
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Status NEW Posted 13 Jul 2017 12:07 PM My Price 13.00

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