Calculate the cost of common stock

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Reference no: EM13289749

Meacham Corp. wants to issue bonds with a 9% coupon rate, a face value of $1,000, and 12 years to maturity. Meacham estimates that the bonds will sell for $1,090 with issuing (flotation) costs will equal $15 per bond - which reflects an 8% before tax cost of debt on the bonds. Meacham's preferred stock currently sells for a price of $36 per share, and their dividend payment is 8% on these $100 par value preferred stocks. Meacham's common stock has a beta of 1.4 and the risk free rate associated with common stock is 4%. The average return of the market as a shoe for common stocks is 10%. Meacham's marginal tax rate is 38%. Meacham's capital structure is 40% debt, 50% common equity, and 10% preferred stock.

a. Calculate the after-tax cost of debt assuming Meacham's bonds are its only debt.
b. Calculate the cost of preferred stock.
c. Calculate the cost of common stock/equity.
d. Calculate the weighted average cost of capital for Meacham's $30 million capital budget.

Reference no: EM13289749

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