1. Stanley Manufacturing Company’s earnings per share have been growing at an 8 percent rate per year for the last ten years and investors expect this past trend to continue. The firm’s common stock, 140k outstanding, is now selling for $50.00 per share and the expected dividend for the current year is 50 percent of 1996 earnings per share of $4.00
New preferred stock paying a $5.00 dividend could be sold to the public at a price of $52.50, which includes a $2.50 floatation cost. The current interest rate on new debt is 8 percent. The firm’s tax rate is 40 percent. The firm’s capital structure, which is considered to be optional, is as follows;
B.V.
Debt $2,500,000.00
Preferred Stocks 500,000.00
Common Equity 7,000,000.00
Total $10,000,000.00
(a) Calculate the after-tax cost of:
1. New debt
2. New preferred stock
3. Common stock equity (assuming new equity comes only from retained earnings).
(b) Calculate the weighted average cost of capital assuming no new common stock is sold.