The Accidental Petroleum Company is trying to determine its weighted average cost of capital for...

Question:

The Accidental Petroleum Company is trying to determine its weighted average cost of capital for use in making a number of investment decisions. The firm's bonds were issued 6 years ago and have 14 years left until maturity. They carried an 8% coupon rate, and are currently selling for $962.50. The firm's preferred stock carries a $4.60 dividend and is currently selling at $42.50 per share. Accidental's investment banker has stated that issue costs for new preferred will be 50 cents per share. The firm has significant retained earnings, but will also need to sell new common stock to finance the projects it is now considering. Accidental Petroleum common stock is expected to pay a $2.50 per share dividend next year, and is expected to maintain an 8% growth rate for the foreseeable future. The stock is currently priced at $50 per share, but new common stock will have flotation costs of 60 cents per share.

Calculate the costs of the various components of Accidental Petroleum's capital (Kd, Kp, Ke, Kn).

The firm's tax rate is 34%.

Average Cost Of Capital:

The average cost of capital, WACC, is the average cost of using all resources for supporting the operation. The capital structure would have a significant impact on the value of the WACC.

Answer and Explanation:

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Estimate the cost of debt (Kd):

Use the financial calculator to solve for the cost of debt.

N = 14

PV = -962.50

FV = 1,000

PMT = 1,000 x 8% = 80

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Capital Structure & the Cost of Capital

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Chapter 15 / Lesson 1
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In this lesson, we'll define capital and a firm's capital structure. We'll also discuss the costs associated with each component in the capital structure and learn about the concept of risk and return.


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