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WEIGHTED AVERAGE COST OF CAPITAL -- PEAFIEL AND GODOY COMPANY. Peafiel and Godoy have an optimal capital structure that consists of 60% debt and 40% common equity. They expect to have $60,000,000 of new retained earnings available for investment for the next year.

BONDS. Their investment bankers assure them that they could issue $20,000,000 (net of flotation costs) of $1000 face value bonds carrying a 6% coupon rate, paying annual interest, having a 10-year maturity, at a price of $1200. Flotation costs for this issue would be $10 per bond. The company could issue an additional $40,000,000 (net of flotation costs) of debt, also with a $1000 face value, a 6% coupon rate, a 10-year maturity, at a price of $1200, but flotation costs would be $100 per bond. Bonds issued beyond $60,000,000 will have a flotation cost of $200 per bond, a price of $1200, a 6% coupon rate, and a 10-year maturity.

COMMON STOCK. The current stock price is $80. The expected dividend is $8 per-share, (D1=$8). Dividends are expected to grow at a rate of 7%, forever. 500,000 shares of new stock can be issued at $80 per-share and flotation costas would be $9 per-share. Beyond 500,000 new shares, flotation costs are $11 per-share.

Peafiel and Godoy have a corporate tax rate of 30%.

Sketch the WACC and label all points.