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Part 2: Cost of Capital / WACC Problem #4: Salk Co. is financing a new project via $500,000 of debt, $400,000 of new common stock
Part 2: Cost of Capital / WACC Problem #4: Salk Co. is financing a new project via $500,000 of debt, $400,000 of new common stock issue, and $300,000 of new preferred stock issue. The terms for each of these sources of financing are given below: A bond that has $1,000 par value (face value) and a contract or coupon interest rate of 11 percent. A new issue would have a flotation cost of 5 percent of the S1,125 market value. The bonds mature in 10 years. The firm's average tax rate is 30 percent and its marginal tax rate is 34 percent. A new common stock issue that paid a $1.80 dividend last year. The par value of the stock is $15, and earnings per share have grown at a rate of 7 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant dividend-earnings ratio of 30 percent. The price of this stock is now $27.50, but 5 percent flotation costs are anticipated. A preferred stock paying a 9 percent dividend on a $150 par value. If a new issue is offered. flotation costs will be 12 percent of the current price of $175. Calculate the cost of these individual sources of financing. Calculate the weighted average cost of capital (WACC) for this project
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