1. (Weighted Average Cost of Capital). (65 points). Solve t…
1. (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 $60 par preferred stock pays a fixed annual dividend rate of 7.75%. GHC believes that it could issue more preferred stock at its current price of $54.25. GHC’s common stock is currently selling for $44.50 per share and paid a common stock dividend of $2.70 this year. GHC”s beta is 1.20. GHC retains 30% of its earnings and has an ROE of 18%. GHC expects to grow at its current rate indefinitely. GHC issued bonds with a par value of $1,000 that have 12 years until maturity. The bonds pay a 6.00% coupon rate with interest paid on a semiannual basis. Investors will currently pay $1,050 for each bond. The book value capital structure of GHC is $40,000,000 preferred stock, $155,000,000 common stock and $175,000,000 long-term debt. The market values of the capital structure of GHC is $50,000,000 preferred stock, $250,000,000 common stock and $185,000,000 long-term debt. GHC’s total combined state and federal tax rate is 25%. Given the above information, determine the following for GHC: Cost of preferred stock Cost of common stock Cost of debt capital Weighted average cost of capital (WACC)
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