Calculate the after-tax cost of bonds

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Reference no: EM133111968

The management of Jetson Company believes that the following capital structure is optimal:

Components

$ value

Bond, coupon 8% (now selling at $1075, has 14 years to the maturity and the face value of $1,000)

715,000

Preferred stock (dividend per share = $5.00)

249,000

Common stock

371,000

Retained Earnings

326,000

Total

1,661,000

Dividends on common stock are currently $3 per share, and they are expected to grow at a constant rate of 6 percent. The Jetson Company's common stock is currently selling at $40, and the preferred stock is selling at $50. The Flotation cost on new issues of common stock is 10 percent, and the interest on bonds is paid semi-annually. The return on the market portfolio is 12.1 percent, the risk-free rate is 3 percent, and the company's beta coefficient is 1.22. The company's tax rate is 40 percent.

Calculate the following using excel and show all formulas:

  • the after-tax cost of bonds
  • the cost of preferred stock
  • the cost of retained earnings
  • the cost of new common stock
  • the best estimate of the company's WACC
  • the capital structure of this company

Reference no: EM133111968

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