Question: Robert Bernard is an investment analyst employed to JMMB. He was requested to assess the capital structure of Worthy Park Estate Rums and has provided the following information:
Preferred Stock:
13000 shares of 8 percent preferred stock issued at $100.00 per share. Current market price is $80 per share.
Common Stock:
60 000 shares outstanding, selling for $105 per share. The current treasury bill rate is 12% and the stock's beta is 1.50. The expected rate of return on the average stock in the market is 16%.
Debt:
The firm can borrow funds at 23% interest per year. Assume that the tax rate is 3096.
a. Using the information above to calculate the firm's WACC if the target capital structure comprises 40% debt, 20% preferred stock and 40% common stock.
b. If the beta of the stock was two (2) and the firm's capital structure was modified to 40% debt, 10% preferred stock, and 50% common, what is the firm's WACC?
c. The firm is expected to pay a year end dividend of $10.00 per share at year end and its flotation cost if 10%. Investors have projected an expected growth rate of 8% per annum.
i. What is the cost of retained earnings using the discounted cash flow approach?
ii. Calculate the cost of issuing new common stock.