A New Corp. wants to issue bonds with a 10% coupon rate, a face value of...

A New Corp. wants to issue bonds with a 10% coupon rate, a face value of $1,000, and 15 years to maturity. It estimates that the bonds will sell for $1,100 and that flotation costs will equal $15 per bond. The common stock currently sells for $30 per share and they can sell additional shares by incurring flotation costs of $3 per share. A dividend was paid yesterday of $4.00 per share and expects the dividend to grow at a constant rate of 5% per year. It also expects to have $12 million of retained earnings available for use in capital budgeting projects during the coming year. The capital structure is 40% debt and 60% common equity. The marginal tax rate is 35%.

A) Calculate the after-tax cost of debt assuming bonds are its only debt.

B) Calculate the cost of retained earnings.

C) Calculate the cost of new common stock.

D) Calculate the weighted average cost of capital assuming total capital budget is $30 million.

Expert Solution

jeff jeffy answered 2 years ago

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