Calculate the cost of new common stock

Reference no: EM131997192

Question: 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 and that flotation costs will equal $15 per bond. Meacham Corp. common stock currently sells for $30 per share. Meacham can sell additional shares by incurring flotation costs of $3 per share. Meacham paid a dividend yesterday of $4.00 per share and expects the dividend to grow at a constant rate of 5% per year. Meacham also expects to have $12 million of retained earnings available for use in capital budgeting projects during the coming year. Meacham's capital structure is 40% debt and 60% common equity. Meacham's marginal tax rate is 35%.

a. Calculate the after-tax cost of debt assuming Meacham's bonds are its only debt.

b. Calculate the cost of retained earnings.

c. Calculate the cost of new common stock.

d. Calculate the weighted average cost of capital assuming Meacham's total capital budget is $30 million.

Office Clean Corporation has a capital structure consisting of 30 percent debt and 70 percent common equity. Assuming the capital structure is optimal, what amount of total investment can be financed by a $35 million addition to retained earnings without selling new common stock?

Reference no: EM131997192

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