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# To compute for the Company’s current cost of capital, the costs for each type financing must be

determined. Using the information given, the following values are arrived at.

Cost of Debt

## Dividend = P15 (15% of P100 par value)

Floatation cost = P5

Dividend (D p )
kp =
Market Price ( P p )−Floatation Cost

15
kp = = 14.29%
105−5

## Cost of Common Equity

Cost of common equity is computed for using the dividend growth model.

Dividend = P0.25

## Current Stock Price = P12.50

D1
ks = +g
P0

0.25(1+0.15)
ks = +0.15 = 17.3%
12.50
Cost of New Common Stock

Dividend = P0.25

## Current Stock Price = P12.50

Floatation cost = 5%

D1
ke = +g
P 0−FloatationCost

0.25(1+0.15)
ks = +0.15 = 17.4%
12.50−0.625

## Type Amount of Capital % of Capital Percentage Cost WACC

Structure
Long Term Debt 2,948,400 23.5% 8.78% 2.06%
Preferred Stock 2,000,000 16.0% 14.29% 2.28%
Common Equity 7,582,300 60.5% 17.3% 10.47%
Total 12,530,700 100% 14.81%

## Type Amount of Capital % of Capital Percentage Cost WACC

Structure
Short Term Debt 2,211,300 15.0% 8.45% 1.27%
Long Term Debt 2,948,400 20.0% 8.78% 1.76%
Preferred Stock 2,000,000 13.6% 14.29% 1.94%
Common Equity 7,582,300 51.4% 17.3% 8.90%
Total 12,530,700 100% 13.86%

LCC’s WACC if short term debt were to be excluded would be 14.81% while if short term debt were to be
considered, WACC decreases to just 13.86%.