The optimal capital structure of the company is 30% debt, 10% preferred stock and 60% equity. The Projected retained earnings are $12 million for 2000.
Up to $9 million can be raised via bond at 10% YTM. For more than $9 million, the YTM rises to 12%. Applicable tax rate is 40%.
An unlimited amount can be raised by issuing new preferred stocks with $12 of annual dividends (floatation cost 5% for preferred stocks). The Preferred stock is currently selling at $100.
The common stock dividend has grown at a steady rate from $1.30 in December 1990 to $2.60 in December 1999. The same growth rate is expected to continue for long time in the future.
The stock is selling for $28 per share. The floatation cost for new common stocks is 10%. The following four capital projects have been identified. They are all of average risk, independent, and non-divisible.
Next year is 2000.
Project ____Cost____. IRR
A $10 million. 13.0%
B $12 million. 11.5%
C $20 million. 10.0%
D $8 million. 15.0%
a) What are the costs of debt?
b) What is the cost of issuing new preferred stock?
c) What is the cost of the Retained earnings?
d) What is the cost of issuing new common stock?
e) What is the WACC in the first interval?
f) What is the WACC in the second interval?
g) What is the WACC is the third interval?
h) What is the total capital that this company will raise?