Reference no: EM133125807

Question - Westminster Corp. wants to issue bonds with a 5% coupon rate, a face value of $1,000, and 10 years to maturity. Westminster estimates that the bonds will sell for $980.00 and that flotation costs will equal $15 per bond. Westminster can issue $2.00 dividend perpetual preferred stock for a market price of $25.00 per share. Flotation costs would amount to $3.20 per share. Westminster Corp. common stock currently sells for $130 per share. Westminster can sell additional shares by incurring total flotation costs (underpricing plus flotation costs) of $5.0 per share. Westminster paid a dividend yesterday (D0) of $8 per share and expects the dividend to grow at a constant rate of 4.5% per year. Westminster also expects to have $25 million of retained earnings available for use in capital budgeting projects during the coming year. Westminster intends to exhaust its retained earnings before issuing any new common stock for its capital budgeting needs. Its total capital budget for the coming year is $50 million. Its target capital structure is 40% debt, 10% preferred, and 50% common equity. Westminster's marginal tax rate is 26%.

Required -

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

2. Calculate the cost of perpetual preferred stock

3. Calculate the cost of internal equity (retained earnings).

4. Calculate the cost of external equity (new common stock).

5. Calculate the weighted average cost of capital (WACC).

Solve the problem again assuming that the total capital budget next year is $75 million.