Question

Wilson pharmaceutical is planning a 100 million for development of a new cancer drug. the development will be financed with a combination of debt preferred equity and common equity. the firms current capitol structure which considers to be optimal consists pf 30% debt 20% preferred equity and 50% common equity. the firm can issue bond with a cost of 12% before tax. the investment banker expects to sell the issue at its $100 par value per stock with a $14 annual dividend and will charge a 5% commission fee. Wilson expects to use any common equity needed to finalize the expansion through issuing new common stock to the public. Wilson expects the net proceeds from the sale of the common stock to be $30 per share the firm currently pay a dividend of $3.50 per share and expects its earnings and dividends to grow 10% annual rate for the future the firms marginal tax rate is 40%

a. calculate Wilsons cost of preferred stock

b. cost of external equity

c. calculate wacc

Answer 1