Question
Fantastic firm has a target capital structure that consists of 40% debt, 50% common stock and 10% preferred stock. The firms common stock recently issued
Fantastic firm has a target capital structure that consists of 40% debt, 50% common stock and 10% preferred stock. The firms common stock recently issued a $4 dividend. Dividends are expected to grow at a constant rate of 8% forever. The common stock currently trades for $36 per share. The company also has preferred equity which pays a constant annual dividend of $10 and has a current price of $50. In addition, the firms outstanding bonds have a par value of $1,000, a coupon rate of 10%, 20 years to maturity and are currently trading for $800. Currently, the risk-free rate is 6% and the required return on the market is 12%. If the firms beta is 1.75 and its marginal tax rate is 40%, what is the firms weighted average cost of capital? Hint: Use the average rs .
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