Problem:
Burton currently has $850,000 of long term debt outstanding, 5000 shares of prefered stock ($10 par) with a market price of $12 and 20,000 shares common stock ($20 par) with a market price of $53 a share. They used a WACC of 12% in the past to evaluate projects but want to determine their required return for new investments.
Debt: Burton can sell a 10-year, $1000 par value, 7% annual coupon bond for $975. A flotation cost of 2% of face (par) value would be required. Additionally, the firm has a marginal tax rate of 34%
Prefered Stock: Burton pays $1 dividens annually on their prefered shares. The shares are currently selling for for $12 in the secondary market. They do not have plans to issue any additional prefered stock.
Common Stock: Burtons common stock is currently selleing for $53 per share. The dividens exxpected to be paid at the end of the comming year is $4. Its dividens ayments have been growing at a cosntant %3 rate. It is expected that to sell all the shares, a new common stock issue must be underpriced $1 per share and the firm must pay %1 of the market value per share in flotation costs.
Requirement:
Question 1: Caluclate the after-tax cost of debt.
Question 2: Calculate the cost of prefered equity.
Question 3: Calculate the cost of common equity.
Question 4: Calculate the WACC.
Note: Show supporting computations in good form.