Tiffany Baking Co. wants to arrange for $37.5 million in capital for manufacturing a new baked potato

Question:

Tiffany Baking Co. wants to arrange for $37.5 million in capital for manufacturing a new baked potato chip product line. The current financing plan is 60% equity and 40% debt capital. Calculate the expected WACC for the following financing scenario:

Equity capital: 60%, or $22.5 million, via common stock sales for 40% of this amount that will pay dividends at a rate of 5% per year, and the remaining 60% from retained earnings, which currently earn 9% per year.

Debt capital: 40%, or $15 million, obtained through two sources: bank loans for $10 million borrowed at 8% per year, and the remainder in convertible bonds at a coupon rate estimated to be 10% per year.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...

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