Question
The firm currently has one issue of bonds outstanding. The bonds have a par value of $1,000 per bond, carry a coupon rate of 8
The firm currently has one issue of bonds outstanding. The bonds have a par value of $1,000 per bond, carry a coupon rate of 8 percent, have 14 years to maturity, and are selling for $1,070.Nealon's common stock has a current market price of $ 36 and the firm paid a $2.60 dividend last year that is expected to increase at an annual rate of 6 percent for the foreseeable future.
A) What is the weighted average cost of capital for Nealon's investment using the weights reflected in the actual financing mix (that is,$20 million in retained earnings and $60 million inbonds)?
B) Compute the weighted average cost of capital for Nealon where the firm maintains its target capital structure by reducing its debt offering to 30 percent of the $80 million in new capital, or $24 million, using $20 million in retained earnings and raising $36 million through a new equity offering.
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