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Rweyemamu Ltd ' s financing policy has established that the optimal capital structure is approximately 6 0 % ordinary equity; 1 0 % preferred equity
Rweyemamu Ltds financing policy has established that the optimal capital structure is approximately ordinary equity; preferred equity and debt.
Rweyemamu marginal corporate tax rate is Rweyemamu needs to raise shs million to finance a new project and has collected the following information:
The current market price of common stock is shs per share and the firm just issue shs dividend per share. Dividends are expected to grow at a rate
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of per year indefinetly. In raising ordinary equity, the firm estimates that will be generated internally through retained earnings and through newly issued ordinary equity. Flotation costs on newly issued common stock will be of issue price.
Newly issued preferred equity would have a par value of shs per share, a dividend of shs per share, and flotation costs of shs per share. Rweyemamu believes that it is most likely that new preferred equity would be issued and sold at par.
If the new debt were issued it would have coupon rate of and maturity years. For a face value of shs the issue costs of debt is estimated shs It is expected that since investor's opportunity cost is also that new debt could be sold at face value.
Using the following information, estimate the following:
i The cost of current ordinary equity, the cost of new ordinary equity and the overall cost ordinary equity component to be used in financing new project.
ii The cost of incremental preferred stock
iii. The cost of incremental debt
iv The WACC
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