Question
Jones Communication has the following capital structure, which it considers to be optimal; debt = 20% (long-term debt), preferred stock of 15% and common stock
Jones Communication has the following capital structure, which it considers to be optimal; debt = 20% (long-term debt), preferred stock of 15% and common stock of 65%. Jones Communication effective tax rate is 10%, and investors expect dividends to grow at a constant rate of 5% in the future. Jones Communication paid a dividend of $3.50 per share last year () and its stock currently sells at a price of $50 per share. Ten-year Government bonds yield 7% the market risk premium is 6% and Jones Communications beta is 1.2. The following terms would apply to the new security offerings. Perferred: New preferred stock could be sold to the public at a price of $100 per share, with a dividend of $11. Flotation costs of $5 per share would be incurred. Debt: Debt could be sold at an interest rate of 8%. Common: New common equity will be raised only by retained earnings. a. Find the component costs of debt? (3) b. Find the cost of preferred stock? (2) c. Find the cost of common stock? (3) d. What is the WACC?
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