Problem:
Anderson Enterprises, Inc. has determined its optimal capital structure, which is composed of the following sources and target market value proportions: Source of Capital: Target Market Proportions: Long-Term Debt 60% Common Stock Equity 40% The pre-tax interest rate on new $2,000 par value bonds that Anderson Enterprises may issue is 8%. The firm's common stock is currently selling for $74.00 per share. The dividend expected to be paid at the end of the coming year (D1) is $5.00. The firm's dividend payments have been growing at a constant rate of 3% for the last five years the firms marginal tax rate is 40%.
Requirement:
Question 1: Calculate Anderson Enterprises after-tax cost of debt financing.
Question 2: Calculate Anderson Enterprises cost of retained earnings.
Question 3: Assume that Anderson Enterprises plans to finance a warehouse expansion utilizing retained earnings, together with debt financing, in the target capital structure proportions provided in the chart above. Calculate Anderson Enterprises a Weighted Average Cost of Capital (WACC).
Note: Be sure to show how you arrived at your answer.