Question
You have estimated the market values of Acme Manufacturing's capital structure as follows: debt of $200 million, preferred stock of $100 million, and common stock
You have estimated the market values of Acme Manufacturing's capital structure as follows: debt of $200 million, preferred stock of $100 million, and common stock of $500 million. The current costs of each form of financing is as follows: the cost of debt is 7%. the cost of preferred stock is 9%, and the cost of common equity is 12%. However, you have determined that the cost of each component of capital would be 10% greater due to the presence of flotation costs associated with arranging new financing to support its growth? Calculate the appropriate WACC to be used for capital budgeting purposes assuming new issues of each form of capital are needed to generate the needed financing. The firm faces a tax rate of 40%.
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