Case Scenario:
Rose Corp., a privately-owned company, is going public soon. After the IPO, the company expects its total assets to be $50 million. It plans to raise $25 million by selling 12%, 20-year bonds at par. Rose also anticipates selling $5 million of preferred stock, with each share ($100 par value) receiving an annual dividend of $13.50. Although the preferred shares will be sold to investors at par, the issuer will pay 4% in flotation costs to the investment banker.
Rose plans to issue $20 million of common stock, at $15 each in the IPO. Flotation costs are expected to be $1.25 per share. Management believes the company will be able to pay a dividend of $ 1.50 per share at the end of the year and that the dividend can grow 6% per year. The company's combined federal and state tax rate is 40%.
Calculate the firm's weighted average cost of capital (WACC).