Calculation of Weighted Average Cost of Capital using New Common Stock and Retained Earnings

Question

Assets                                                                                      Claims

Current assets              $200,000,000              Current Liabilities                   $100,000,000

Fixed Assets               $400,000,000              Bonds ($1000 par)                  $200,000,000

                                                                        Preferred stock (($25 par)       $100,000,000

                                                                        Retained earnings                   $   50,000,000

                                                                        Common stock ($10 par)        $150,000,000

Total assets                  $600,000,000              Total claims                             $600,000,000

The bonds sell currently for $980, pay an annual 8% coupon, net $0.98 for each dollar sold, and mature in 20 years.  The preferred stock sells currently for $30, pays an annual $3 dividend, and has 4% flotation costs.  The common stock sells currently for $12; next year’s dividend is expected to be $0.75 with an anticipated annual growth rate of 6% and the flotation costs are 6%.  The firm’s tax rate is 40%.

1. Find the component costs
2. Find the component weights
3. Find the weighted average cost of capital using retained earnings

Find the weighted average cost of capital using new common stock           

Summary

This question belongs to finance and discusses about calculation of weighted average cost of capital using new common stock of a company.

Total word count: Excel