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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

kd = cost of debt x (1 – tax rate)

Tax Rate = 35%

Short term notes payable (13%)

kstd = 13% x (1 – 35%) = 8.45%

Long term debt (13.5%)

kltd = 13.5% x (1 – 35%) = 8.78%

Cost of Preferred Stock

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

Dividend growth (g) = 15%

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

Dividend growth (g) = 15%

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

WACC excluding Short Term Debt

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%

WACC including Short Term Debt

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%.