Question
Braxton Company's long-term debt yields 12%. It could sell preffered stock with an $8 annual dividend for $80. The firm's beta is 1.1, the risk-free
Braxton Company's long-term debt yields 12%. It could sell preffered stock with an $8 annual dividend for $80. The firm's beta is 1.1, the risk-free rate is 7%, and the required rate of return on the market is 12%. Braxton's next dividend is estimated to be $2 and it is growing at a constant rate of 4%. The firm's stock is selling for $25 per share. Its estimate of the risk premium for stocks versus bonds is 1%. Braxton's target capital structure is 30% debt, 10% preffered 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 Braxton's after tax cost of debt? b.) What is their cost of preffered stock? c.) What is the firm's cost of retained earnings? (Use all three methods) d.) What is the firm's WACC after tax?
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