Question
1. Braxton Companys long-term debt yields 12%. It could sell preferred stock with an $8 annual dividend for $80, but flotation costs would be 5%.
1. Braxton Companys long-term debt yields 12%. It could sell preferred stock with an $8 annual dividend for $80, but flotation costs would be 5%. The firms beta is 1.1, the risk-free rate is 7%, and the required rate of return on the market is 12%. Braxtons next dividend is estimated to be $2.00, and it is growing at a constant rate of 4%. The firms stock is selling for $25 per share. Its estimate of the risk premium for stocks versus bonds is 1%. Braxtons target capital structure is 30% debt, 10% preferred stock, and 60% common stock. The firm expects $50,000 in retained earnings and must incur flotation costs of 10% on new common stock sales. Its tax rate is 40%.
a. What is Braxtons after tax cost of debt?
b. What is their cost of preferred stock?
c. What is the firms cost of retained earnings? (Use all three methods.)
d. What is the firms WACC after tax?
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