After this pandemic and completion of your degree, you along with you three best friends, has...

After this pandemic and completion of your degree, you along with you three best friends, has started a large steel manufacturing company. One of you has majors in finance and after a thorough industry analysis expects Habib Bank to help you in issuing Debt at interest rate of 8%. Your company, according to your business partners, is able to issue preferred share @ $25 each along with per year dividend of $2.5/share. Your company has already issued common stock at $20 per share and plans to give dividend per share of $1.5 in the coming year. Industry analysis has ensured that your company would see a constant growth of 5% every year. Your company falls in 35% tax rate bracket.

Currently all three of you are considering different capital structure for your firm and has shortlisted two possible structures. Calculate your company’s WACC as per both and rule out which is better to go for.

Debt	30%
preferred stock	5%
common stock	65%
Total	100%

Structure A Structure B

Debt	45%
preferred stock	5%
common stock	50%
Total	100%

Note: add last three digits of your enrollment number which is 015 in value of per share preferred stock and value of per share of common stock before starting your question

Expert Solution

jeff jeffy answered 1 year ago

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