Question
The X Inc. is contemplating raising new funds for investment from different sources of capital: debt (fixed-rate bonds) and common stock equity. The corporation has
The X Inc. is contemplating raising new funds for investment from different sources of capital: debt (fixed-rate bonds) and common stock equity. The corporation has to calculate the weighted average cost of capital. The book value of its debt is $400,000, while the book value of its equity is $600,000. The market value of debt equals its book value. The market price of its common stock is $24, and there is 40,000 common stock outstanding. To issue new equity,firm has to cover the flotation costs of $1.5 per share. The firm paid a dividend of $2 at the end of the previous year, and is expected to increase the dividend each year by 5% (constant rate of growth). The corporate tax rate is 20%.
The company is going to issue 10-year, 8% coupon (stated annual interest rate) bonds, each with a par value of $ 1000, which will be sold for $ 990 to compensate for the lower coupon interest rate. The flotation costs are 2% of the par value of the bond.
Calculate; Cost of debt, cost of equity, WACC, share of debt, share of equity. (In Excel)
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