Weighted average cost of capital

Valence Industries issues a bond to finance a new project. It offers a 10-year, $1,000 face value,
5 percent semi-annual coupon bond. Upon issue, the bond sells at $1,025. Valence’s marginal tax
rate is 35 percent. Valence has one class of preferred stock outstanding, a $3.75 cumulative
preferred stock, and the price of this stock is $72. Valence Industries also has a current dividend
of $2 per share, a current price of $40 per share, and an expected growth rate of 5 percent.
Following table demonstrates the details of sources of finances. Determine WACC based on
both book value weights and market value weights.
Source of capital Balance sheet value Face value Market Floatation costs
price
Common share $500,000 $10 $40 4%
Preferred stock 157,000 100 72 @1.5 per share
Bond 200,000 1000 1025 1%