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The Mackie MFG Company is trying to determine its weighted average cost of capital for use in making several investment decisions. The firm's bonds were issued 6 years ago and have 14 years left until maturity. They carry a coupon rate of 12% but its investment dealer has informed the company that the yield to maturity for bonds of equal risk is currently 11%. Flotation costs for new debt will be 4 % of the amount issued.
The firm's preferred stock is selling at $60 per share and has been yielding 4% in the current market. Mackie's investment dealer has stated that issue costs for new preferred will be 5%
The firm will need to sell new common stock to finance the project it is now considering. Mackie common stock paid a dividend last year of $2.00 per share. Common share dividends are expected to maintain a growth rate of 6% for the foreseeable future. The stock is currently priced at $20 per share, and new common stock will have flotation costs of 5%
Required
Problem 1: Calculate the company's weighted average cost of capital assuming the optional capital structure is 40% debt, 10% preferred stock and 50% equity. Their tax rate is 40%
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