21 May 1S WEIGHTED AVERAGE COST OF CAPITAL (WACC2) IF IT HAS TO ISSUE NEW COMMON STOCK?
Question
5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,900 face value and a 10% coupon, semiannual payment ($95 payment every 6 months). The bonds currently sell for $845.87. If the firm’s marginal tax rate is 40%, what is the firm’s after-tax cost of debt? Round your answer to 2 decimal places
Quantitative Problem: Barton Industries can issue perpetual preferred stock at a price of $52 per share. The stock would pay a constant annual dividend of $3.80 per share. If the firm’s marginal tax rate is 40%, what is the company’s cost of preferred stock? Round your answer to 2 decimal places.
The firm’s target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm’s weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings is used in the firm’s WACC calculation. However, if the firm will have to issue new common stock, the cost of new common stock should be used in the firm’s WACC calculation.
Quantitative Problem: Barton Industries expects that its target capital structure for raising funds in the future for its capital budget will consist of 40% debt, 5% preferred stock, and 55% common equity. Note that the firm’s marginal tax rate is 40%. Assume that the firm’s cost of debt, rd, is 6.6%, the firm’s cost of preferred stock, rp, is 6.1% and the firm’s cost of equity is 10.6% for old equity, rs, and 11.02% for new equity, re. What is the firm’s weighted average cost of capital (WACC1) if it uses retained earnings as its source of common equity? Round your answer to 3 decimal places. Do not round intermadiate calculations.
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What is the firmA????1s weighted average cost of capital (WACC2) if it has to issue new common stock? Round your answer to 3 decimal places. Do not round intermadiate calculations.
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