Problem:
Robinson Company has a marginal tax rate of 40%. The firm can raise debt at a 12% interest rate and the last dividend paid by the firm was $0.90. Robinson 's common stock is selling for $8.59 per share, and its expected growth rate in earnings and dividends is 5%. If Robinson issues new common stock, the flotation cost incurred will be 10%. The firm plans to financial all capital expenditures with 30% debt and 70% equity.
Requirement:
Question 1: What is Robinson's cost of retained earnings if it can use retained earnings rather than issue new common stock?
Question 2: What is the cost of the common equity raised by selling new stock?
Question 3: What is the firm's WACC if the firm has sufficient retained earnings to fund the equity portion of its capital budget?
Note: Provide support for your underlying principle.