Question

1. Black Diamond, Inc., a manufacturer of carbon and graphite products for the aerospace and transportation industries, is considering several funding alternatives for an investment project. To finance the project, the company can sell 1,000 20-year bonds with a $1,000 face value, 6% coupon rate. The bonds require an average discount of $50 per bond and flotation costs of 3% of bond price. The company can also sell 5,000 shares of preferred stock that will pay a $2.5 dividend per share at a price of $30 per share, with flotation costs of 5% of preferred stock price. To calculate the cost of common stock, the company uses the dividend discount model. The firm just paid a dividend of $3 per common share. The company expects this dividend to grow at a constant rate of 3.5% per year indefinitely. The flotation costs for issuing new common shares are $5 per share. The company plans to sell 10,000 shares at a price of $60 per share. The company’s tax rate is 35%.

1. What is the company’s weighted average cost of capital without flotation costs?
2. What is the company’s weighted average cost of capital with flotation costs?

Answer 1