Please show your calculations for every problem,
6. L$M has target capital structure of 50% common stock, 30% debt and 20% preferred stock. The company wishes to issue new 25 years bond with 11% coupon rate. The flotation cost will be $15 and the bond has to be sold at 5% premium. To issue new preferred stock the company has to pay $1.5 as flotation cost. The market value of preferred stock is $10 and the stock will pay $1.5 dollar dividend. New common stock will cost the company $2.5. The last dividend was $2.8 and the market value is $17. Tax rate is 40%. What is the company
Please show your calculations for every problem,
6. L$M has target capital structure of 50% common stock, 30% debt and 20% preferred stock. The company wishes to issue new 25 years bond with 11% coupon rate. The flotation cost will be $15 and the bond has to be sold at 5% premium. To issue new preferred stock the company has to pay $1.5 as flotation cost. The market value of preferred stock is $10 and the stock will pay $1.5 dollar dividend. New common stock will cost the company $2.5. The last dividend was $2.8 and the market value is $17. Tax rate is 40%. What is the company
Related questions
Bremond Equipment Supply Corporation (BESC) needs to determine its Weighted Average Cost of Capital in order to make a few capital budgeting decisions. The firm has already established the proporation of its capital. Use these proportions in calculating the firm's WAAC.
|
| Target Market |
| Source of Capital | Proportions |
| Long-term debt | 69% |
| Preferred stock | 5% |
| Common stock equity | 26% |
Debt: BESC can sell a 15-year, semi-annual,$1,000 par value, 8.75 percent bond for $985. A flotation cost of 1.75 percent of the face value would be required in addition to the discount of $15.
Preferred Stock: BESC has determined it can issue preferred stock at $70 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $2 per share.
Common Stock: BESC's common stock is currently selling for $42 per share. The dividend expected to be paid at the end of the coming year is $5.35 Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.00. It is expected that to sell, a new common stock issue must be underpriced at $4 per share and the firm must pay $1 per share in flotation costs.
Additionally, the firm's marginal tax rate is 40 percent.
To help determine the firmâs WACC, we will break this problem down into steps:
Calculate the rate for the new bond issue, notice is has semi-annual compounding.
Calculate the after-tax cost of the bond issue.
Calculate the cost of the new issue of preferred stock.
Calculate the growth rate of the common stock dividends.
Calculate the cost of the new common stock issue.
Finally, calculate the firm's weighted average cost of capital assuming the firm has exhausted all retained earnings.
