Case Scenario:
Company B has a optimal capital structure with the following sources/target market ratios:
SOURCE OF CAPITAL Target Market Ratios
long term debt 30%
preferred stock 5%
commonn stock equity 65%
Debt: The firm can sell a 15 year, $1,500 par value, 10 percent bond for $1,300
A flotation cost of 2% of the face value would be required in addition to the discount of $200
Preferred Stock: The firm issues stock at $70 per share par value. The stock will pay a $7.00 annual dividend. The cost of issuing and selling the stock is $4 per share
Common Stock: Common Stock is currently selling for $40 per share. The expected dividend to be paid at the end of the year is $4.56.
The dividend 5 years ago was $2.34 and has been growing at a constant rate ever since. It is expected that to sell, a new common stock issue must be underpriced at $1.10 per share and the firm must pay $1.10 per share in flotation costs. The firm has a marginal tax rate of 35%
The firm has used up all of it's retained earnings. Calculate the firm's weighted average cost of capital.