Question
Posters Inc. recently hired you as a consultant to estimate the companys WACC. You have obtained the following information. (1) Posters have bonds outstanding. The
Posters Inc. recently hired you as a consultant to estimate the companys WACC. You have obtained the following information.
(1) Posters have bonds outstanding. The bonds mature in 15 years, with a 9% semiannual coupon, a par value of $1,000, and a market price of $1,057. (2) The companys tax rate is 30%. (3) Posters outstanding preferred stock that pays $2.8 dividend is traded at $34. (4) The risk-free rate is 1.0%, the market index return is 3.0%, and the stocks beta is 0.1.3. (5) The target capital structure consists of 25% debt, 10% preferred stock, and 65% equity.
Posters Inc. uses the CAPM to estimate the cost of equity, and it does not expect to have to issue any new common stock.
a) What is the companys cost of debt? b) What is the cost of preferred stock? c) What is the cost of equity? d) If the company raises new capital in a manner that is designed to keep the actual capital structure on target over time, what is its WACC?
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