You have been able to make smart business decisions and now own a company of your own!!! Your new company has the following information available to you as you make capital budgeting decisions.
Source of capital Target market proportions
Long term debt 20%
Preferred stock 10%
Common stock equity 70%
DEBT – The firm can sell a 12 year, $1,000 par value, 7% (coupon interest rate) bond for $960
A flotation cost of 2% of the face value would be required in addition to the discount (in price) of $40 ($1,000-$960)
PREFERRED STOCK – Can be issued at $75 per share par value. It will pay an annual dividend of $10. Cost of issuing & selling this stock would be $3 per share
COMMON STOCK – Currently selling for $18 per share. Dividend expected to be paid at the end of the coming year is $1.74. Dividends have been growing at a constant rate for 4 years and 4 years ago, the dividend was $1.50. In selling this stock – flotation costs would amount to $1per share from the current selling price. Your company’s tax rate is 40%
Your cost for issuing new common stock is?
Your cost of preferred stock is?
Your WACC presuming you will have to issue new shares of common stock?