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The firm's tax rate is 40%. The current price of Harry Daviss 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is
| The firm's tax rate is 40%. | ||||||
| The current price of Harry Daviss 12% coupon, semiannual payment, noncallable | ||||||
| bonds with 15 years remaining to maturity is $1,153.72. Harry Davis does not use | ||||||
| short-term interest-bearing debt on a permanent basis. New bonds would be privately | ||||||
| placed with no flotation cost. | ||||||
| The current price of the firms 10%, $100 par value, quarterly dividend, perpetual | ||||||
| preferred stock is $116.95. Harry Davis would incur flotation costs equal to 5% of the | ||||||
| proceeds on a new issue. | ||||||
| Harry Daviss common stock is currently selling at $50 per share. Its last dividend (D0) | ||||||
| was $3.12, and dividends are expected to grow at a constant rate of 5.8% in the | ||||||
| foreseeable future. Harry Daviss beta is 1.2; the yield on T-bonds is 5.6%; and the | ||||||
| market risk premium is estimated to be 6%. For the over-own-bond-yield-plus- | ||||||
| judgmental-risk-premium approach, the firm uses a 3.2% judgmental risk premium | ||||||
| Capital Structure | Before-Tax Cost | After-Tax Cost | Component Cost | |||
| Debt | 30.00% | |||||
| Preferred | 10.00% | |||||
| Common | 60.00% | |||||
| WACC | ||||||
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