Problem:
A company has determined that its optimal capital structure consists of 40% debt and 60% equity. Assume the firm will not have enough retained earnings to fund the equity portion of its capital budget. Also, assume the firm accounts for flotation costs by adjusting the cost of capital. Given the following information, calculate the firms weighted average cost of capital, ie: WACC.
kd = 8%
Net income = $40,000
Payout ratio = 50 %
Tax rate = 40%
Po = $25
Growth = 0 %
Shares outstanding = 10,000
Flotation cost on additional equity = 15 %
(Note: first you will need to determine the dividend, then the cost of new common stock since the firm does not have enough retained earnings for the equity funding, then the WACC can be calculated).