Calculate the WACC both before and after the breakpoints

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Reference no: EM131183572

On January 1 the total market value of DOS Company was $50 million. During the year, the company plans to raise and invest $10 million in new assets. The firm's present market value, optimal capital structure is $10 million debt and $40 million equity. Up to $1 million in new bonds can be sold for $975 each if the maturity is 10 years, the face value is $1000 and the annually paid coupon rate is 11%. Selling any bonds beyond that point will raise only $950 each. Assume that there is no short-term debt. The common stock is currently selling at $45 per share and can be sold to net the company $43 a share after flotation costs. The beta of the firm is 1.5 and the risk-free rate is 8% while the return on the market is 12%. The dividend is $3.38 to be paid next year, and the firm has an annual expected growth rate of 7.5% which is expected to be continuous for the foreseeable future. The bond yield plus risk premium approach assumes that stock should earn at least 4% more than the initial rate on debt issued by the company. Retained earnings are projected to be $5 million and the marginal tax rate is 40%.

1. Are there any breakpoints in this WACC, where are they located, and what caused them to occur?

2. Calculate the WACC both before and after the breakpoints.

Reference no: EM131183572

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