Transcribed Image Text
Balance Sheet Data Long-TermDebt 80,000,000 PreferredStock 20,000,000 CommonEquity 20,000,000Number of shares of Common 1,500,000 Price per shareCommon $42Number of shares ofPreferred 150,000 Price per sharePreferred $108Number of 8% Coupon 25-year Bonds 40,000 Price of 8% 25-yearBonds $1075Number of 6% Coupon 15-year Bonds 40,200 Price of 6% 15-yearBonds $920Forecasted Dividend on Common(D1) $3.25 Dividend Rate onPreferred 9.5%Par Value ofPreferred $100 Current 10-Year Treasury Yld. 4.3%Standard Deviation ofStock 40% Correlation Stock vs. Market 0.50Standard Deviation ofMarket 15% Market RiskPremium 4.8%Risk Premium of our Stock over our 15-yrBonds 3.8% Forecasted Constant Growth 2.9%TaxRate 25% Flotation costs onBonds 1.2%Flotation costs onPreferred 2.2%Calculate the appropriate weights to use for the financingsources. (Hint: Assume that the firm feels their current mix oflong-term debt is good and would like to raise capital with thesame mix of maturities)Calculate the after-tax cost of debt (hint: You can account forthe two bonds by taking a weighted average of their cost or bykeeping them separate and putting both into the WACC formula attheir individual weights). Note that there are flotation costs of1.2% on bonds.Calculate the cost of preferred. Note that there are flotationcosts of 2.2% on preferred stock.Calculate the cost of common (Hint: Use all three methods andtake an average). Note that all common equity will come frominternally generated equity (retained earnings) which means no newshares will be issued and no flotation costs incurred.Calculate the WACCWhy are firms likely to prefer internally generated equity toissuing new shares of common? Identify and briefly explain tworeasons.If my firm had two separate divisions – one relatively low riskand one relatively high risk, how might I apply the WACC to eachdivision?