Joe Inc is calculating its weighted avg cost of capital. The following has been determined:
Debt. A $1,000 face value bond with 10 year maturity and 9 percent coupon rate bond can be sold at $940 (includes flotation cost). The coupon is paid semi-annually, and the marginal corporate tax rate is 50%.
Pref Stock. $10 dividend can be sold at $91 per share (incl flotation cost.)
Common Equity. Current Market price is $70 per share. Cash Dividend this year was $5, growth rate is expected to be 12%, the appropriate risk free rate is 5%, beta is 1.25 and the equity over own bonds premium is 6%.
Capital Structure is as follows.
Debt 30%
Pref Stock 20%
Common Stock = ?
A. What is Joe Inc.'s weighted avg cost of capital?
B. For new equity, flotation cost of Joe Inc is $10 per share. What is the new cost of equity?
C. Assume that retained earnings totaled $10 million. What investment amount in the company's projects would require the issuance of new common stock?
D. What is the WACC after the issuance of new common stock?
E. If the company issues $5million in new common stock what is the max investment that the company could make before issuing other sources of capital?