Strange Sights Paranormal Investigators Inc. has a target capital structure that calls for:
40% debt
10% preferred stock
50% common equity
The firms current bonds have a before tax cost of debt of 10% and the firm is in the 40% tax bracket. The firm can sell as much debt as it wishes at this rate. The firms preferred stock currently sells for $90 a share and pays a dividend of $10 per share; however, the firm will pay flotation cost of $10 per share. Strange sights' common stock sells for $40 a share with flotation costs of $6 per share from the sale of new common stock. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10% per year. Assume the firm has sufficient retained earnings to fund the equity portion of its capital budget.
1. What is the firms cost of retained earnings? (15.5%)
2. What is the firms cost of newly issued common stock? (16.5%)
3. What is the firms cost of newly issued preferred stock? (12.5%)
4. What is the firms weighted average cost of capital? (11.7%)
The answers are giving in ( ) as a guide, I must show how I got them. Please help!!!!!
Strange Sights Paranormal Investigators Inc. has a target capital structure that calls for:
40% debt
10% preferred stock
50% common equity
The firms current bonds have a before tax cost of debt of 10% and the firm is in the 40% tax bracket. The firm can sell as much debt as it wishes at this rate. The firms preferred stock currently sells for $90 a share and pays a dividend of $10 per share; however, the firm will pay flotation cost of $10 per share. Strange sights' common stock sells for $40 a share with flotation costs of $6 per share from the sale of new common stock. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10% per year. Assume the firm has sufficient retained earnings to fund the equity portion of its capital budget.
1. What is the firms cost of retained earnings? (15.5%)
2. What is the firms cost of newly issued common stock? (16.5%)
3. What is the firms cost of newly issued preferred stock? (12.5%)
4. What is the firms weighted average cost of capital? (11.7%)
The answers are giving in ( ) as a guide, I must show how I got them. Please help!!!!!
