Question
The ABC Company is trying to determine its weighted average cost of capital for use in making several investment decisions. The firm's bonds were issued
The ABC Company is trying to determine its weighted average cost of capital for use in making several investment decisions. The firm's bonds were issued 6 years ago and have 14 years left until maturity. They carry a coupon rate of 10.0 percent, but its investment dealer has informed the company that the current yield to maturity for bonds of equal risk is currently 9.0 percent. Flotation costs for new debt will be 4 percent of the amount issued.The firm's preferred stock is selling at $62.00 per share and has been yielding 4.0 percent in the current market. Accidental's investment dealer has stated that issue costs for new preferred will be 4 percent.The firm will need to sell new common stock to finance the projects it is now considering. ABC common stock paid a dividend last year of $2.00 per share. Common share dividends are expected to maintain a growth rate of 6.0 percent for the foreseeable future. The stock is currently priced at $24.00 per share, and new common stock will have flotation costs of 4 percent.
Calculate the company's weighted average cost of capital assuming the optimal capital structure is 40 percent debt, 20 percent preferred stock, and 40 percent equity. Their tax rate is 35 percent.
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