Reference no: EM132018567
Question - Nova Corporation is interested in measuring the cost of each specific type of capital as well as the weighted average cost of capital. Historically, the firm has raised capital in the following manner: Source of capital Weight Long-term debt 35% Preferred stock 12 Common stock equity 53 The tax rate of the firm is currently 40%. The needed financial information and data are as follows: Debt Nova can raise debt by selling $1,000-par-value, 6.5% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $20 per bond needs to be given. There is an associated flotation cost of 2% of par value. Preferred stock Preferred stock can be sold under the following terms:
The security has a par value of $100 per share, the annual dividend rate is 6% of the par value, and the flotation cost is expected to be $4 per share. The preferred stock is expected to sell for $102 before cost considerations.
Common stock The current price of Nova's common stock is $35 per share. The cash dividend is expected to be $3.25 per share next year. The firm's dividends have grown at an annual rate of 5%, and it is expected that the dividend will continue at this rate for the foreseeable future. The flotation costs are expected to be approximately $2 per share. Nova can sell new common stock under these terms.
Retained earnings The firm expects to have available $100,000 of retained earnings in the coming year. Once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing. (Note: When measuring this cost, the firm does not concern itself with the tax bracket or brokerage fees of owners.)
TO DO - Create a spreadsheet to answer the following questions:
a. Calculate the after-tax cost of debt.
b. Calculate the cost of preferred stock.
c. Calculate the cost of retained earnings.
d. Calculate the cost of new common stock.
e. Calculate the firm's weighted average cost of capital using retained earnings and the capital structure weights shown in the table above.
f. Calculate the firm's weighted average cost of capital using new common stock and the capital structure weights shown in the table above.