On January 1 the total market value of gk company was:
$55 million. During the year, the company palns to raise and invest $10 million in new assets. The firm's present market value, optimal capital structure is $12 million debt and $48 million equity. Up to $1 million in new bonds can be sold for $980 each if the maturity is 12 years, the face value is $1050 and the annually paid coupon rate is 12%. Selling any bonds beyond that point will only raise $955 each. Assume there is no short term debt. The common stock is currently selling at $45 a share after flotation costs. The beta of the firm is 1.5 and the risk free rate is 9% while the return on the market is 13%. The dividend is $3.40 to be paid next yar, and the firm has an annual expected growth rate of 7.8% which is expected to continue for the foreseeable future. The bond yield plus risk premium approach assumes that stock should earn at least 5% more than the initial rate on debt issued by the company. Retatined earnings are projected to be $6 million and the marginal tax rate is 40%.(SHOW WORK AND FORMULAS)
a. How much of the capital budget must be financed by common equity to maintain the optimal capital structure? How much of the new funds are generated by new debt? By new stock?
b. Calculate the two costs of debt.
c. Estimate the current cost of quity by taking an average of the three different methods of estimation.
d. What is the cost of equity after flotation costs?
e. Are there any breakpoints in the WACC, where are they located, and what was the cause?
f. Calculate the WACC both before and after the breakpoints.
These are difficult problems, please only answer the parts you know, I appreciate any help.