Question
Gizmo Inc has outstanding 10 year bonds with a 12% coupon rate, annual payments selling for $1,300. Its preferred stock is selling for $150 and
Gizmo Inc has outstanding 10 year bonds with a 12% coupon rate, annual payments selling for $1,300. Its preferred stock is selling for $150 and pays a fixed dividend of $15. Gizmo Inc. common stock is selling for $200 and has a beta of 1. The risk-free rate is 5% and the expected return on the market is 14%. The target Capital structure calls for 40% debt, 20% Preferred Stock, and 40% Common Equity.
Gizmo Inc. is considering the purchase of a new machine for 100,000. It will be depreciated using the MACRS 3-year class life [33%, 45%, 15% and 7%] and can be used for three years at which time it will have a market value of $37,000. Purchase of the new machine will cause an increase in net operating working capital by $10,000. Operating costs are expected to decrease by $100,000 per year.
The firm has a marginal tax rate of 40%
What is the before tax of debt?
What is the cost of preferred stock?
What is the cost of common equity?
What is the weighted average cost of capital?
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