Question: SIU Corp, has determined its optimal capital structure which is composed of the following sources and target market value proportions.
Long term Debt 20%
Preferred stock 10%
Common stock 70%
The firm can sell a 12-year, annual, 7 percent bond for $960. The bond`s flotation cost is 2 percent of the face value.
The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.
The 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. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in floatation costs. Additionally, the firm's marginal tax rate is 40 percent.
Calculate the weighted average cost of capital.