Reference no: EM131072669
The balance sheet that follows indicates the optimum capital structure for Nealon Inc. Flotation costs are (a) 3% of market value for a new bond issue, and (b) $1.00 per share for preferred stock. The dividends for common stock were $2.50 last year, ten years ago the dividends were $1.40 per share. The firm is in a 35% percent tax bracket. What is the weighted average cost of capital if the firms finances are in the following proportions?
Bonds (8%, $1,000 par, 26-year maturity) ------------------- 30%
Preferred Stock (5,000 shares outstanding, $50 par, $1.50 dividend) ------------------------ 10%
Common Equity ($1 par) market value $35 -------------------------- 60%
1. Market prices are $1,135 for bonds, $21 for preferred stock, and $35 for common stock.
2. Flotation costs of bonds up to $2,000,000 of bonds is 3%.
3. More than $2M, the flotation cost increases to 6%.
4. The company would obtain the first $3,000,000 of equity from retained earnings.
5. Equity above $3M would be obtained from the sale of new common stock. (10% flotation cost).
a. Calculate the component cost of each type of capital.
b. Calculate the $ levels at which the cost of capital would change.
c. And calculate the WACC at each level.
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: The balance sheet that follows indicates the optimum capital structure for Nealon Inc. Flotation costs are (a) 3% of market value for a new bond issue, and (b) $1.00 per share for preferred stock. Equity above $3M would be obtained from the sale of ..
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