Question:Consider the following:
VK estimates that it can issue debt at a before-tax cost of 8%, and its tax rate is 40%. The company can also issue preferred stock at $30 per share, which pays a constant dividend of $4.00 annually. Floatation costs on the preferred are $3 per share.
Net income is estimated to be $45,000, and the firm plans to maintain its policy of paying out 60% as dividends. The company's stock currently sells for $26 per share. The next dividend is expected to be $1.15, which is $.20 higher than the most recent dividend. Furthermore, these dividends are expected to continue to grow at the same rate. If the company maintains its capital structure, the cost of debt will remain constant. Furthermore, while there are float costs associated with the issuance of new preferred stock, the company has shelf-registered common stock that it can issue without incurring float costs. The company's balance sheet is as follows (in 000s):
PP&E $5,800 Debt $3,000
Cash $1,200 Preferred Stock $2,000
Inventories $3,000 Common Equity $5,000
Total Assets $10,000 Total Liab. $10,000
12. What is the retained earnings breakpoint?
13. What is the cost of retained earnings?
14. What is the relevant cost of debt?
15. What is the current WACC for VK company?
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