The Horizon Corp. has 40 million shares of common stock with a current market price of $14.00 per share. They have $270 million in par value of long-term bonds outstanding that currently sell for $935 per $1,000 par value. The bonds have a coupon rate of 7.6% and a maturity of 20 years. Assume annual coupon payments. Horizon also has $120 million in par value of preferred stock with a current market price of $108 per $100 of par value. The dividend on this preferred stock is $8.80 per year. Flotation costs on new preferred stock will be about 3%.
The dividend on common stock in the most recent year (i.e. D0) was $0.60. The firm has a growth rate of 4.5% that is expected to continue indefinitely into the future. On new common stock flotation costs would be about 8%. Flotation costs on new bonds would be negligible.
1. Discuss, in general terms, how a firm’s investment policy can affect its WACC
2. Explain how a company’s capital structure policy could affect its WACC