Your company is estimating its WACC. Its target capital structure is 30 percent debt, 10 percent...

Your company is estimating its WACC. Its target capital structure is 30 percent debt, 10 percent preferred stock, and 60 percent common equity. Its bonds have an 8 percent coupon, paid quarterly, a current maturity of 15 years, and sell for $895. The firm could sell, at par, $100 preferred stock which pays $10 annual dividend, but flotation costs of 5 percent would be incurred if the company will issue new preferred stocks. This company’s beta is 1.3, the risk-free rate is 8 percent, and the market risk premium is 7 percent. This is a constant-growth firm and it just paid a dividend of $1.00, sells for $30.00 per share, and has a growth rate of 6 percent. The firm's policy is to use a risk premium of 5 percentage points when using the bond-yield-plus- risk-premium method to find cost of equity. The company will incur 7% floatation cost if issuing new common stocks. The firm's marginal tax rate is 40 percent.

1. What is the component cost of debt?

2. What is the cost of new preferred stock?

3. What is the cost of common stock using the CAPM approach?

4. What is the cost of common stock using the DCF approach

5. What is cost of common stock using the bond-yield-plus-risk-premium approach?

6. What is current WACC (use CAPM)? What is the WACC if the company will issue new preferred stocks and new common stocks?

Expert Solution

jeff jeffy answered 1 year ago

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