Question
Debt: The firm can sell a 20-year, semi-annual,$1,000 par value, 9 percent bond for $980. A flotation cost of 2 percent of the face value
Debt: The firm can sell a 20-year, semi-annual,$1,000 par value, 9 percent bond for $980. A flotation cost of 2 percent of the face value would be required in addition to the discount of $30.
Preferred Stock: The firm has determined it can issue preferred stock at $70 per share, par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: The firm's common stock is currently selling for $42 per share. The dividend expected to be paid at the end of the coming year is $5.07. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.45. It is expected that to sell a new common stock issue which must be underpriced at $1 per share and, in addition, the firm must pay $1 per share in flotation costs. The firm's marginal tax rate is 40 percent.
Sources of Capital | Target Weights |
Long term debt | 35% |
Preferred Stock | 5% |
Common Stock Equity | 60% |
--Calculate the firm's weighted average cost of capital assuming the firm has exhausted all retained earnings. --
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