A firm has determined its optimal capital structure. Source of capital: Long term debt: Target market proportions 20%
Preferred Stock:Target market proportions 10%
Comon stock equity: Target market prportions 70%
To expand operations, the firm is considering the following sources of financing its capital expenses:
Debt: the firm can sell a 12 yr, $1,000 par value bond paying a 7% annual coupon for $960. To issue the bond the firm will have to pay bond issuance or flotation costs of 2% of the face value of the bond.
Preferred Stock: The firm has determined that it can issue preferred stock at a par value price of $75 per share. The stock will pay $10 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common stock: A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. The firm's dividends have been growing have been growing at a constant rate of 4% per year for the last four years and are expected to sustain the growth thereafter.
New common stock issue: if the firm decides to issue new common stock, its underwriter indicated that the issue will have to be underpriced by $1 below the current share price. further, the firm will pay $1 per share in issuance or flotation costs. The firm's marginal tax rate is 40%
Find the firm's weighted average cost of capital, if the firm uses debt, preferred stock and retained earnings to finace the ivestment. What rate of return should be required from the investments?
Find the firm's cost of financing using a new common stock issue .
Find the firm's cost of financing using the retained earnings.
Find the weighted average cost of capital if the firm uses debt, preferred stock, retained earnings, and new stock issue to finance the invest. What rate of return should the firm require from its investments.