Question

The Phillips Company is considering increasing its headphone production capacity to fulfill a large private contract. The CFO has tasked her finance staff to analyze the project and make a recommendation to the executive team to be included at next month’s board meeting. The CFO provides the following information to the analyst: COST OF CAPITAL Phillips’ current capital structure is comprised of $200,000,000 in debt, $100,000,000 in preferred equity, and $500,000,000 in common equity. Phillips currently has issued bonds that mature in 10 years with a coupon rate of 6% and a current market price of $1,255. Preferred shares of Phillips are trading at $45/share and pay an annual dividend of $2.05/share. Common stock of Phillips has a beta of 1.4 and trades at $32/share. The 10-year US treasury yield is 3.5%. The market risk premium is estimated at 6.5%. Their tax rate is 21%. Round answers to four decimal places (ie .1125 or 11.25%)

What is the current cost of Phillips debt capital?

What is the current cost of Phillips preferred equity capital?

Answer 1

The cost of debt capital for Phillips is $75.30 million and the cost of preferred equity capital is 4.56%.

Step-by-step explanation:

The cost of debt capital for Phillips is calculated by multiplying the coupon rate of the bonds by the market price of the bonds:

Cost of debt capital = Coupon rate * Market price

Cost of debt capital = 6% * $1,255

Cost of debt capital = $75.30 million

The cost of preferred equity capital for Phillips is calculated by dividing the annual dividend by the market price of the preferred shares:

Cost of preferred equity capital = Annual dividend / Market price

Cost of preferred equity capital = $2.05 / $45

Cost of preferred equity capital = 0.0456 or 4.56%