Cost of Capital

Chapter 10- The Cost of Capital You have collected the following data about a company: Management has announced a target capital structure of 25% bonds, 15% preferred stock, and 60% common stock. he best comparable security for your bond analysis is an outstanding issue of $1,000 face value, 7.50% coupon bonds with 30 years remaining until maturity. The bonds are currently selling at l03(103%oface value). Your investment banker has advised that a new 30-year issue could be sold for a flotation cost of 2.5% of face value. . The best comparable security for your preferred stock analysis has $100 face value, a S12 annual dividend, and is currently selling for $90 per share. Your investment banker has advised that a new preferred stock issue could be sold for a flotation cost of 6% of face value. The best comparable security for your common stock analysis is your company's own common stock which is currently selling for $23.50 per share. Investors anticipate the next annual dividend to be $3.50, and the consensus forecast is that the company will continue to grow at a 3% annual rate. Your investment banker has advised that a new common stock issue could be sold for a flotation cost of 8% of face value. The company expects net income of $1,500,000 in the coming year out of which it expects to pay a $600,000 dividend. The company pays taxes at 21%. . Calculate: 1. The required rate of return of bondholders and the cost of bond financing. 2. The required rate of return of preferred stockholders and the cost of preferred stock 3. The required rate of return of common stockholders and the cost of financing with 4. The company's WACC when it uses retained earnings as its source of new common 5. The break point caused by running out of new retained earnings. financing. retained earnings and with a new common stock issue. equity financing. The company's WACC when it uses an issue of common stock as its source of new 6. common equity financing