Bogart Gaming Company (BGC) has the following capital structure, which it considers to be optimal: 25% debt, 15% preferred stock, and 60% common stock. BGC's tax rate is 40%, and its investors expect dividends to grow at a constant rate of 6% in the future. BGC paid a dividend of $3.70 last year (D0) on its common stock, and the stock is currently priced at $60 per share.
Debt can be sold at an interest rate of 9%.
New preferred stock could be sold to the public at a price of $100 per share with a dividend of $9, but flotation costs of $5 per share would be incurred.
Only retained earnings will raise any new common equity.
- Find the component costs of debt, preferred stock, and common stock.
- What is the Weighted Average Cost of Capital (WACC)?