Question

Weighted Average Cost of Capital - P & G

Penafiel and Godoy have an optimal capital structure that consists of 60% debt and 40% common equity. They expect to have $32,000,000 of new retained earnings for investment next year.

Bonds. Their investment bankers assure them that they could issue $18,000,000 (net of flotation costs) of $1000 face value bonds carrying a 10% coupon rate, paying semiannual interest, having a 10-year maturity, at a price of $1150. Flotation costs for this issue would be $50 per bond. Bonds issued beyond $18,000,000 will have a flotation cost of $100 per bond, a price of $1050 a 10% coupon rate, semiannual interest, and a 10- year maturity.

Common Stock. The current stock price is $60. The dividend paid yesterday was $9 per share. Dividends are expected to grow at a rate of 6% forever. New shares of stock can be issued at $60 per share and flotation costs would be $3 per share.

Sketch the marginal cost of the capital schedule and label all points

Discuss how you would use this information in making investment decisions