24 Jul WHAT IS THE COMPANYS COST OF PREFERRED STOCK?
de Show more Bigtime Coffee is considering a number of strategic acquisitions and thus needs to determine its cost of capital. The firms CFO Myron Gordon gathered the following data: The only debt securities the firm has outstanding are 25000 of its original 10-year 8% coupon bonds which are paid semi-annually and have a par value of $1000; currently the bonds have 8 years until maturity and are selling at a price of $1085; The firm has 1.6 million preferred shares outstanding currently priced at $10.00 and is offering an annual (preferred) dividend of $1.65; There are also 3.2 million shares of common stock outstanding currently priced at $19.00/share; the company just paid a $1.25 dividend which is expected to increase by 5% annually (forever). Note that Bigtime Coffee pays floatation costs (i.e. commissions) of 3% of the price on all newly issued securities (including bonds) and the companys marginal tax rate is 30%. a) What is Bigtime Coffees after-tax cost of debt? b) What is the companys cost of preferred stock? c) Using the CFOs favorite model calculate the firms cost of common equity. d) Compute Bigtime Coffees after-tax weighted average cost of capital. Show less
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