Component Costs of Capital and WACC (& MCC)

Part A. Information follows: Find individual component costs of capital then overall weighted avg. cost.

Ideal Capital Structure: 50% Debt, 10% Preferred Stock, 40 % Equity (retained earnings and/or CS) Tax rate: 43%

Equity: rmkt = 12.3% rrf = 2.3% Beta = 1.43 Expected growth rate = 6.2% Common Stock price = $33.90

Historical risk premium of equity over long term debt = 6.7% Last dividend = $3.33 per share NO flotation

Debt: 9% coupon, 25 years, annual payments, current price = $924.225 $14 Per bond, flotation cost

Preferred: Annual dividend = $2.40, current price = $22.23, 10% flotation cost

rd ______ rps _______ re debtprem _______ rcapm_______ rdivgro__________WACC =_____________

Part B. In the WACC above, the equity calculation was for retained earnings (or new CS with no flotation cost), and therefore was the first tier of a MCC curve. If New Common Stock has a 15% flotation cost, what would be the second or next tier of the MCC curve? Assume PS and debt costs are the same as above.