The firm is forecasting its retained earnings equal to $300,000 in the coming year. Once retained earnings have been exhausted, Coleman plans to issue new shares of common stocks to raise capital. Up to $300,000 of new common stock can be sold at a flotation cost of 15%. Above $300,000, the flotation cost would rise to 25%.

7) What is the WACC after retained earnings have been exhausted and Coleman issues up to $300,000 of new common stock with a 15% flotation cost? (Hint: Calculate the new cost of equity, using the DCF method, then find new WACC)

answer WACC1= 14% ;WACC=15%

8) What is the WACC if more than $300,000 of new common equity is sold? (Hint: Calculate the new cost of equity, using the DCF method, then find new WACC)

9) Explain in words why new common stock that is raised externally has a higher percentage cost than equity that is raised internally as retained earnings. Under which conditions would it not be appropriate to use internal funding rather than external funding for projects?

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