(Weighted Average Cost of Capital). (65 points). Solve the…
(Weighted Average Cost of Capital). (65 points). Solve the following weighted average cost of capital problem: You just started as a Financial Analyst at Gridiron Helmet Company (GHC), a small-cap publicly-traded company that manufactures football helmets. Your manager has just informed you that your first task will be to calculate the weighted average cost of capital (WACC) for GHC. The following general and company specific information has been provided to you: GHC’s $50 par preferred stock pays a fixed annual dividend rate of 6.75%. GHC believes that it could issue more preferred stock at its current price of $54.35. GHC’s common stock is currently selling for $45.00 per share and has not paid a dividend since its inception (5 years ago), and GHC does not expect to pay any dividend in the foreseeable future. Bloomberg.com currently indicates that 10-year Treasury-Notes are yielding 3.50%. Also, the market return for small-cap stocks is 10.75%, the market return for mid-cap stocks is 9.65%, and the market return for large-cap stocks is 9.15%. Finally, according to Value Line, GHC’s beta is 1.22. GHC sold 15-year bonds with a par value of $1,000 that were issued exactly 3 years ago. The bonds pay a 5.75% coupon rate with interest paid on a semiannual basis. Investors will currently pay 3% over face value for each bond. The market values of the capital structure of GHC is $5,000,000 preferred stock, $22,500,000 common stock and $16,000,000 long-term debt. GHC’s total combined state and federal tax rate is 27%. Given the above information, determine the following for Gridiron Helmet Company: Cost of preferred stock Cost of common stock Cost of debt capital Weighted average cost of capital (WACC)
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