Finansal Yönetim - II The Capital Budgeting Process 3 19. Global Technology ’ s capital structure is as follows: Debt ............................ 60 % Preferred stock ........... 5 Common equity .......... 35 Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.8 percent, the cost of preferred stock is 11 percent, and the cost o f common equity (in the form of retained earnings) is 15.6 percent. C alculate Global ’ s weighted average cost of capital . 20. Maryott Holets wants to determine the minimum cost of capital point for the firm. Assume it is considering the following financial plans: Cost (aftertax) Weights Plan A Debt ........................................ 6.0% 20% Preferred stock ....................... 10.0 10 Common equity ...................... 13.0 70 Plan B Debt ........................................ 6.5% 30% Preferred stock ....................... 10.5 10 Common equity ...................... 13.5 60 Plan C Debt ........................................ 7.0% 40% Preferred stock ....................... 10.7 10 Common eq uity ...................... 14.2 50 Plan D Debt ........................................ 9.0% 50% Preferred stock ....................... 11.2 10 Common equity ...................... 16.0 40 Which of the four plans has the lowest weighted average cost of capital? (Round to two places to the right of decimal point.) 22. Given the following information, calculate the weighted average cost of capital for Digital Processing, Inc. Line up the calculations in the order shown in Table 11-1 on ___. Percent of capital structure: Preferred stock ................. 15 % Common equity ................ 40 Debt .................................. 40Additional information: Corpora te tax rate ............................... 34 % Dividend, preferred ............................ $8.50 Dividend, expected common .............. $2.50 Dividend, preferred ............................ $105.00 Growth rate ........................................ 7% Bond yield .......................................... 9.5 Flotation cost, preferred ..................... $3.60 Price, common ................................... ............................................................ $ 75.00 24. McNabb Construction Company is trying to calculate its co st of capital for use in making a capital budgeting decision. Mr. Reid, the vice- president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 9.5 percent coupon rate and another bond with a 7.8 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 10.5 percent. The common stock has a price of $50 and an expect ed dividend (D 1 ) of $1.60 per share. The historical growth pattern (g) for dividends is as follows. $2.00 2.24 2.51 2.81 Compute the historical growth rate, round it to the nearest whole number, and use it for g. The preferred stock is selling at $90 per share and pays a dividend of $8.50 per share. The corporate tax rate is 30 percent. The flotation cost is 2 percent of the selling price for preferred stock. The optimum capital structure for the firm is 30 percent debt, 10 percent preferred stock, and 60 percent common equity in the form of retained earnings. Compute the cost of capital for the individual components in the capital structure, and then calculate the weighted average cost of capital