ABC has the following market value capital structure, which is considered to be optimal. The firm has no preferred stock.
Debt $400,000
Equity $600,000
New bonds currently have a 10% coupon rate and ABC's stock sells for $20 per share. The expected growth in dividends is 8 percent. The corporate tax rate is 30 percent and the firm net income was $5 million, Finally , the firm paid 20% of its earnings out as dividends. 1 Million shares outstanding.
a) What is the firms cost of capital?
b) If the flotation cost is 10%, how much capital can the firm raise before its marginal cost of capital increases? What is the new cost of capital?