1. NCC Corporation is considering building a new facility in Texas. To raise money for the capital projects,
the corporation plans the following capital structure: 30% of money will come from issuing bonds,
and 70% will come from Retained Earnings or new common stock.
The corporation does not currently have preferred stock. NCC Corporation will issue bonds with an interest rate of 8%
up to $30 million dollars in bonds. After issuing $30 million in bonds, the interest cost will rise to 12.5%.
The next dividend on common stock is expected to be $2.00 per share. The stock price is $25.00 per share, and is expected
to grow at 3% per year. The flotation cost for issuing new common stock is estimated at 10%.
NCC Corporation has $66 million in retained earnings that can be used.
The tax rate for NCC Corporation is 35%.
1. What is the initial Weighed Average Cost of Capital (WACC) for NCC Corporation?
2. There are two breakpoints in NCC's capital structure. At what point does the first breakpoint occur?
3. At what point does the second breakpoint occur?
4. What is the Weighted Average Cost of Capital (WACC) after the first breakpoint?
5. What is the WACC after the second breakpoint? Please show work at each step so that I can learn how to complete these problems!