The Cullumber Products Co. currently has debt with a market value of $300 million outstanding. The...

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The Cullumber Products Co. currently has debt with a marketvalue of $300 million outstanding. The debt consists of 9 percentcoupon bonds (semiannual coupon payments) which have a maturity of15 years and are currently priced at $1,429.26 per bond. The firmalso has an issue of 2 million preferred shares outstanding with amarket price of $20 per share. The preferred shares pay an annualdividend of $1.20. Cullumber also has 14 million shares of commonstock outstanding with a price of $20.00 per share. The firm isexpected to pay a $2.20 common dividend one year from today, andthat dividend is expected to increase by 6 percent per yearforever. If Cullumber is subject to a 40 percent marginal tax rate,then what is the firm’s weighted average cost of capital?

Excel Template
(Note: This template includes the problem statement as itappears in your textbook. The problem assigned to you here may havedifferent values. When using this template, copy the problemstatement from this screen for easy reference to the values you’vebeen given here, and be sure to update any values that may havebeen pre-entered in the template based on the textbook version ofthe problem.)
Calculate the weights for debt, common equity, and preferredequity. (Round intermediate calculations and finalanswers to 4 decimal places, e.g. 1.2514.)
Debt
Preferred equity
Common equity
Calculate the cost of debt. (Round intermediatecalculations to 4 decimal places, e.g. 1.2514 and final answer to 2decimal places, e.g. 15.25%.)
Cost of debt %
Calculate the cost of preferred equity. (Roundintermediate calculations to 4 decimal places, e.g. 1.2514 andfinal answer to 2 decimal places, e.g. 15.25%.)
Cost of preferred equity %
Calculate the cost of common equity. (Roundintermediate calculations to 4 decimal places, e.g. 1.2514 andfinal answer to 0 decimal places, e.g. 15%.)
Cost of common equity %
What is the firm’s weighted average cost of capital?(Round intermediate calculations to 4 decimal places,e.g. 1.2514 and final answer to 2 decimal places, e.g.15.25%.)
WACC

Answer & Explanation Solved by verified expert

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WeightDebt04839Preferred equity00645Common equity04516Cost See Answer

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Transcribed Image Text

The Cullumber Products Co. currently has debt with a marketvalue of $300 million outstanding. The debt consists of 9 percentcoupon bonds (semiannual coupon payments) which have a maturity of15 years and are currently priced at $1,429.26 per bond. The firmalso has an issue of 2 million preferred shares outstanding with amarket price of $20 per share. The preferred shares pay an annualdividend of $1.20. Cullumber also has 14 million shares of commonstock outstanding with a price of $20.00 per share. The firm isexpected to pay a $2.20 common dividend one year from today, andthat dividend is expected to increase by 6 percent per yearforever. If Cullumber is subject to a 40 percent marginal tax rate,then what is the firm’s weighted average cost of capital?Excel Template(Note: This template includes the problem statement as itappears in your textbook. The problem assigned to you here may havedifferent values. When using this template, copy the problemstatement from this screen for easy reference to the values you’vebeen given here, and be sure to update any values that may havebeen pre-entered in the template based on the textbook version ofthe problem.)Calculate the weights for debt, common equity, and preferredequity. (Round intermediate calculations and finalanswers to 4 decimal places, e.g. 1.2514.)DebtPreferred equityCommon equityCalculate the cost of debt. (Round intermediatecalculations to 4 decimal places, e.g. 1.2514 and final answer to 2decimal places, e.g. 15.25%.)Cost of debt%Calculate the cost of preferred equity. (Roundintermediate calculations to 4 decimal places, e.g. 1.2514 andfinal answer to 2 decimal places, e.g. 15.25%.)Cost of preferred equity%Calculate the cost of common equity. (Roundintermediate calculations to 4 decimal places, e.g. 1.2514 andfinal answer to 0 decimal places, e.g. 15%.)Cost of common equity%What is the firm’s weighted average cost of capital?(Round intermediate calculations to 4 decimal places,e.g. 1.2514 and final answer to 2 decimal places, e.g.15.25%.)WACC