Problem: ADB Corporation is considering building a new facility in Texas. To raise money for the capital projects, the corporation plans the following capital structure: 30% of money will come from issuing bonds, and 70% will come from Retained Earnings or new common stock.
The corporation does not currently have preferred stock. ADB Corporation will issue bonds with an interest rate of 8% up to $30 million dollars in bonds. After issuing $30 million in bonds, the interest cost will rise to 12.5%.
The next dividend on common stock is expected to be $2.00 per share. The stock price is $25.00 per share, and is expected to grow at 3% per year. The flotation cost for issuing new common stock is estimated at 10%.
ADB Corporation has $66 million in retained earnings that can be used.
The tax rate for ADB Corporation is 35%.
Q1. What is the initial weighed average cost of capital (WACC) for ADB Corporation?
Q2. There are two breakpoints in ADB's capital structure. At what point does the first breakpoint occur?