Answer:
7.98%
Explanation:
For computing the market value capital structure we need to do following calculations which are shown below:
Market value of stock = 7,500,000 × $62 per share = $465,000,000
Cost of Equity = Risk Free rate + Beta × Market risk Premium
= 3.4% + 1.10 × 7.2%
= 11.32%
Market value of Bond = 108% × $2,000 × 160,000 bonds = $345,600,000
Coupon = 5.6% × 2000 ÷ 2 = 56
Number of Periods(n) = 18 × 2 = 36
Market value = $2000 × 1.08 = $2160
Cost of debt (YTM) using excel formula is
= RATE(36,56,$2,000,-$2,160)
= 4.92%
Market value of Preferred Stock = 275,000 × $94 = $25,850,000
Cost of Preferred Stock = 4.7%
Total value = $465,000,000 + $345,600,000 + $25,850,000
= $836,450,000
Equity ratio = $465,000,000 ÷ $836,450,000 = 0.5559
Debt ratio = $345,600,000 ÷ $836,450,000 = 0.4132
Preferred Stock ratio = $25,850,000 ÷ $836,450,000 = 0.0309
Now the market capital structure is
Cost of Project = Equity Ratio × Cost of Equity + Debt ratio × ( 1-Tax rate) × Cost of Debt + Preferred Stock ratio × Cost of Preferred stock
= 0.5559 × 11.32% + 0.4132 × (1 -24%) × 4.92% + 0.0309 × 4.7%
= 7.98%
