Calculate the cost of preferred stock

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Reference no: EM13943591

Meacham Corporation 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 equal $15 per bond—this reflects an 8% before tax cost of debt on the bonds. Meacham’s preferred stock currently sells for a price of $30 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. The risk free rate of return associated with their common stocks is 4%. The average return of the market as a whole for common stock is 10%. Meacham's marginal tax rate is 35%. 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: EM13943591

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Calculate the cost of preferred stock : Meacham Corporation 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 equal $15 per bond—this reflects an 8% before tax c..

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