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Cost of Capital - Solutions12

# Cost of Capital - Solutions12 - 48 Assume that your firm...

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Old Exam Questions - Cost of Capital - Solutions Page 37 of 42 Pages 48. Assume that your firm has estimated that it will spend \$20 million on new capital budgeting projects during the coming year and that you have been asked to calculate the appropriate cost of capital to be used to analyze these projects. You have collected the following information: Your firm’s targeted capital structure consists of 40 percent debt and 60 percent common equity. Your firm expects to add \$5.0 million to retained earnings over the coming year that can be used to support the \$20 million in new projects. The company has corporate bonds outstanding with an 9 percent annual coupon that are trading at par. New debt can be issued as a private placement (no flotation expense) and will have the same level of risk as the firm’s current debt. The company’s tax rate is 40 percent. The risk-free rate is 4 percent. The market risk premium is 6 percent. The stock’s beta is 1.5. The company expects to pay a dividend on its common stock of \$2.20 per share next year (D 1 ). The company’s ROE is 20% and its dividend payout rate is 73%. The current stock price (P 0 ) is \$28.95 per share. If the firm issues new shares of common stock, they will sell for \$27.50 per share (a slight discount from the current price), and the firm will have to pay flotation expense of 10.0% (\$2.75). Each of the projects to be taken on has the same degree of risk as the current projects of the firm. Given this information, determine what the WACC/MCC will be for the very first dollar to be raised. A. 9.28% B. 9.79% C. 9.45% * D. 9.96% E. 9.62%

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Cost of Capital - Solutions12 - 48 Assume that your firm...

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