Company finance structure is 25% bonds, 10% preferred stock, and 75% common stock, the bonds each...

Company finance structure is 25% bonds, 10% preferred stock, and 75% common stock, the bonds each have a face value of $1,000, selling at a discount of $35 today with maturity in 10 years, annual coupon interest of 8% and flotation cost of 2 1/2%, companys tax rate is 34%, preferred stock has a 7% annual dividend and par at $100 which can be sold today for $85, underwriters fee for the sale would be $2 per share, new common stock is selling at current price of $45 per share, expected dividend for 2020 is $3.60, dividends have grown at consistent rate (2019 $3.46 2018 3.33 2017 3.2 2016 3.08 2015 2.96), to attract buyers management will underprice shares by $4 and flotation costs will be $2.50 per share, dividend payouts are expected to continue at constant growth, calculate after-tax cost of debt, calculate cost of preferred stock issue, assume rs = rr calculate cost of new common stock issue, using finance structure of the firm, calculate the after-tax WACC

Expert Solution

Cost of Debt = [Interest * (1-tax rate)+{(Redemption Value-Net Proceeds)/No.of years}]

Redemption Value+Net Proceeds/2

80*(1-0.34)+{(1000-940.875)/10)}

(1000+940.875)/2

=80*0.66+{(59.125)/10}

970.438

=(52.8+5.9125)/970.438

=6.05% or 6% approx

*Net Proceeds = Issue Price - Floatation Cost

=965-(965*2.5%)

=965-24.125

=940.875

jeff jeffy answered 2 years ago

1. The target capital structure for a firm is 40% common stock, 10% preferred stock and...

1. The target capital structure for a firm is 40% common stock, 10% preferred stock and 50% debt. If the cost of common equity is 18%, the cost of preferred stock is 10%, the before-tax cost of debt is 8%, and the firm’s tax rate is 35%. What is its weighted average cost of capital? Indicate the detailed steps on how to use a FINANCIAL CALCULATOR to solve the problems.

The firm’s target capital structure is 60% common stock, 30% debt, and 10% preferred stock. Debt:...

The firm’s target capital structure is 60% common stock, 30% debt, and 10% preferred stock. Debt: 7,000 5.0% coupon bonds outstanding, with 11 years to maturity, $1,000 par value and a quoted price of 106.25% of par value. These bonds pay interest semiannually. Common Stock: 300,000 shares of common stock selling for $65.40 per share. The stock has a beta of 1.44. Preferred Stock: 8,500 shares of preferred stock selling at $96.00 per share and pay annual dividends of $5.70....

Mullineaux Corporation has a target capital structure of 75 percent common stock and 25 percent debt....

Mullineaux Corporation has a target capital structure of 75 percent common stock and 25 percent debt. Its cost of equity is 11.5 percent, and the cost of debt is 6.2 percent. The relevant tax rate is 25 percent. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Sara's Cafe has the following capital structure: Bonds $450 million Preferred Stock $300 million Common stock...

Sara's Cafe has the following capital structure: Bonds $450 million Preferred Stock $300 million Common stock $500 million Retained Earnings $250 million The specific costs of capital are as followsl: Bonds 6.2% Preferred Stock 7.4% Common Stock 16.8% Retained Earnings 14.9% Calculate the WACC.

Company has the following target capital structure, in market value terms: Debt 30% Preferred Stock 10% Common...

Company has the following target capital structure, in market value terms: Debt 30% Preferred Stock 10% Common Stock 60% In addition, you know the following: · At present the company’s debt is composed of $1,000 par bonds issued exactly three years ago, that pay a semiannual coupon, with a nominal annual rate of 7%, that have a ten-year maturity, and that are now selling for $1,150. · The company’s preferred stock is paying a $1.50 annual dividend and is currently selling...

You are going to finance a project with common stock and coupon bonds. The common stock...

You are going to finance a project with common stock and coupon bonds. The common stock cost will be estimated based upon the Dividend Growth Model. The firm just paid a dividend of $2, with an estimated growth rate of 5% and a current price of $50. The coupon rate on the bonds is 8% and the YTM is 7%. The firm has a tax rate of 21%. If you use $650,000 of common equity and $500,000 of coupon bonds,...

“Common stock is the riskiest corporate security, followed by preferred stock and then bonds.” Is it...

“Common stock is the riskiest corporate security, followed by preferred stock and then bonds.” Is it correct,explain in detail

Assume that the company has the following capital structure: Debt $15,000,000 Preferred stock $7,500,000 Common stock...

Assume that the company has the following capital structure: Debt $15,000,000 Preferred stock $7,500,000 Common stock $27,500,000 What will be the cost of capital if the company decide to raise the needed capital proportionally and with following costs? Please use the following information to calculate the weighted cost of capital: Bond: A 30-year bond with a face value of $1000 and coupon interest rate of 13% and floatation cost of $20 (Tax is 35%) Preferred stock: Face value of $35...

The White Corporation has a capital structure of 60 percent common equity, 10 percent preferred stock,...

The White Corporation has a capital structure of 60 percent common equity, 10 percent preferred stock, and 30 percent debt. This capital structure is believed to be optimal. To finance expansion plans over the coming year, the firm expects to have $40 million in retained earnings available. The cost of retained earnings is 18 percent. Additional common equity can be obtained by selling new common stock at a cost of 19.6 percent. Preferred stock can be sold at a cost...

AA corporation has a capital structure consisting of 40% debt, 10% preferred stock, and 50% common...

AA corporation has a capital structure consisting of 40% debt, 10% preferred stock, and 50% common equity. Assume the firm has a sufficient retained earnings to fund the equity portion of its capital budget. It has 20-year, 14% semiannual coupon bonds that sell at their par value of $1,000. The firm could sell, at par, $50 preferred stock that pays a 8% annual dividend. AA’s beta is 1.4, the risk-free rate if 5%, and the market risk premium is 8%....

Question