Question: The financial managers at Geiger-Counter Inc. (GCI) are wanting to know their WACC to make a sound decision on whether to obtain more debt. GCI currently has outstanding bonds that mature in 10 years with a semi-annual 7% coupon. These bonds are currently selling for $906 and they want to issue the new bonds at par. As far as equity is concerned, GCI is expected to grow at a 5% rate for as long as it is in business. Currently the company's common stock is selling for $55/share. The most recent dividend paid by GCI was $4.00/share. If new common stock is issued, GCI will incur flotation costs equal to 7.5%. GCI has no outstanding preferred stock
a. What is the company's before-tax cost of debt, assuming they issue new debt?
b. What is the company's after-tax cost of debt, assuming they issue new debt? The tax rate is 35%.
c. What is the company's cost of retained earnings?
d. What is its cost of new common equity?
e. What would the company's WACC be at 60/40, and 40/60 Debt/Assets ratios? Assuming interest rates would be the same.