Jacobs Corp want to calculate it weighted average cost of capital (WACC). The company's CFO has collected the following information:
- The company's 20 year long-term bonds with 10% semiannual coupon are currently sold at $950. The firm can issue bonds only $300 million at this price. Beyond this amount , the firm can issue the bonds at the same price, but the firm has to pay 12% semiannual coupon.
-The company's current stock price is $25 per share (P0=$25)
-The company recently paid a dividend of $2 per share (D0=$2)
-The dividend is expected to grow at a constant rate of 6% a year (g = 6%)
-The company pays a 10% flotation cost whenever it issues new common stock (F=10%)
-The company's balance shee shows 50% equity and 50% debt
-The company's target capital structure is 60% equity and 40% debt.
-The firm expects to earn $700 million in after tax income during the coming ear, and it will retain 90% of those earnings.
-The company's tax rate is 40%.
1) What is the breakpoint of debt and the breakpoint of retained earnings? Show work.
2) What is the company's WACC if it must fund a capital budget requiring $1,200,000,000 in total new capital? Show work.