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Davenport Inc. has a target capital structure of 35% debt, and 65% of common equity. The current price of the firm's 7% coupon, semiannual payment,
Davenport Inc. has a target capital structure of 35% debt, and 65% of common equity. The current price of the firm's 7% coupon, semiannual payment, non-callable bonds with 10 years remaining maturity is $1,100. New bonds would be privately placed with a flotation cost equally to 4% of the proceeds on a new issue of bond. The firm's cost of common equity is estimated to be 12%. The corporate tax rate is 40%. (10 points) (hint: there is no tax shield on equity) What is the firms before-tax cost of debt financing? What is the firms WACC?
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