Question
Nero Company currently has a capital structure made up of debt, preferred stock and common stock. They are in the process of issuing more common
Nero Company currently has a capital structure made up of debt, preferred stock and common stock. They are in the process of issuing more common stock and selling more bonds.
Bond #1 is a new bond that is selling for $920 and has a $1,000 par, 5.5% rate and 12 years to maturity. Float costs are 1.5% of the market price new bonds. It will pay interest on an annual basis.
Bond #2 is an existing bond that is currently selling for $955 and has a $1,000 par, 5.0% rate and 20 years to maturity. Float costs are 1.5% of the market price new bonds. It pays interest on an annual basis.
Preferred stock is an existing stock and selling for $98 per share, with a $100 par value and an 6% dividend rate. Float cost are 1.5% of the market price with new issues.
Common stock is currently selling for $75 and will pay an expected dividend of $1.75. Investors expect a 8% growth rate on this stock. The new stock has a 2.5% float cost associated with it.
Determine the weighted average cost of capital for the Nero Company using the chart below and the above/below information. Nero has a 30% tax rate and the following market values per each security:
AT Cost $ % WACC
Bond #1 $12,000,000.
Bond #2 18,000,000.
Preferred Stock 10,000,000
Existing Common Stock 49,000,000
New Common Stock 11,000,000
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