Whitley Motors Inc. has the following capital.

Debt: The firm issued 900, 25 year bonds five years ago which were sold at a par value of $1,000.The bonds carry a coupon rate of 7%, but are currently selling to yield new buyers 10%.

Preferred Stock:3,500 shares of 8% preferred were sold 12 years ago at a par value of $50.They're now priced to yield 11%.

Equity: The firm got started with the sale of 10,000 shares of common stock at $100 per share.Since that time earnings of $800,000 have been retained.The stock is now selling for $89.Whitley's business plan for next year projects net income of $300,000, half of which will be retained.

The firm's marginal tax rate is 38% including federal and state obligations.It pays flotation costs of 8% on all new stock issues.Whitely is expected to grow at a rate of 3.5% indefinitely and recently paid an annual dividend of $4.00.

Develop Whitley's WACC before and after the retained earnings break and indicate how much capital will have been raised when the break occurs.

First develop the market based capital structure by valuing the capital components.

Debt:

Preferred: ______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Equity:_______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

The market value based capital structure is then

Total capital contribution

Weight

Debt

Preferred Stock

Equity Capital

Total

Next develop the capital component costs.

Debt:Cost of debt = k_d(1-T) = 6.2%__________________________________________________

Preferred:Cost of preferred = k_p / (1-f) = 11%___________________________________________

Equity from RE: k_e = [D₀(1+g) / P₀] + g = 8.15%__________________________________________

Equity from new stock: k_e = [D₀(1+g) / P₀(1-f)] + g = ____________________________________

_____________________________________________________________________________________

WACC calculations:

Before the break

Mix

Cost

Factor

Debt

Preferred Stock

Equity Capital

Total

After the break

Mix

Cost

Factor

Debt

Preferred Stock

Equity Capital

Total

Calculate the break point

Planned RE = __________________________________________________________________

______________________________________________________________________________