[hai11111]

*Flotation costs are a)10% of market value for a bond issue and b)$2.0 per share for preferred stock.
*The dividend for common stock was $3.0 last year, and the firm is expected to grow at the annual growth rate of 6% forever.
*A firm's tax rate is 40%
type of Financing Proportion
Bonds(10% Coupon, $1,000 par, 3-year Maturity) 25%
Preferred stock(5,000shares outstanding, 25%
$50 par, $2.0 Dividend)
Internal Common equity(Retained Earnings) 50%
Total 100%


a) Market price are $1,111 for bonds, @20 for preferred stocks, and $40 for common stock. Because the firm has sufficient common equity funding(retained earnings), it does not plan to issue new common stock. What's the WACC for this firm?

b) Since the firm's earnings are expected to decrease for coming year, the CEO of the firm decides to issue new common shares, which will be 50% of the total financing (i.e. bond=25%, preferred stock=25%, new common stock=50%). Flotation cost for a new issue is 10% of the market price. What is the cost of equity capital when new shares are sold?

What is the weighted average cost of capital involved in the issuance of new shares(i.e. the combination of the bond, preferred stock, new common stock)?

[Curlyben]

Thank you for taking the time to copy your homework to AMHD.
Please refer to this announcement: CLICK HERE !!