Question
The company you are working for has a target capital structure consisting of 40 percent debt, 5 percent preferred stock, and 55 percent common equity.
The company you are working for has a target capital structure consisting of 40 percent debt, 5 percent preferred stock, and 55 percent common equity. Its bonds have a maturity of $1,000, a 10 percent coupon, paid sei tannually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock that pays a 10 percent annual dividend. but flotation costs of 4 percent would be incurred. The company's beta is 1.2, the risk-free rate is 7 percent, and the market risk premium is 4 percent. Hanover is a constant growth firm that just paid a dividend of $2.50, sells for $26.00 per share, and has a growth rate of 9 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk-premium method to find the cost of retained earnings. Flotation costs on new common stock total 10 percent, and the firm's marginal tax rate is 22 percent. Calculate the WACC if the cost of reinvested capital is obtained using the CAPM approach (i.e., calculate the component cost of debt. cost of preferred stock, cost of reinvested capital cost of retained earnings using the CAPM approach, and the WACC).
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