Reference no: EM133038737
Question - Suppose Westerfield Co. has the following financial information: Debt: Preferred stock: Common stock: 200,000 bonds outstanding with a face value of $1,000. The bonds currently trade at 106% of par and have 20 years to maturity. The coupon rate equals 3%, and the bonds make semiannual interest payments.
250,000 shares of preferred stock outstanding; currently trading for $118 per share and it pays a dividend of $5.45 per share every year.
5,000,000 shares of common stock outstanding; currently trading for $65 per share. Beta equals 0.88.
Market and firm information: The expected return on the market is 10%, the risk-free rate is 2%, the tax rate is 21%.
Required -
1. Calculate the weight of the common stock in the capital structure.
2. Calculate the weight of debt in the capital structure.
3. Calculate the before-tax cost of debt.
4. Calculate the after-tax cost of debt.
5. Calculate the cost of preferred stock.
6. Calculate the cost of common stock.
7. Calculate the weighted average cost of capital.
8. Turtle Co. has a debt-to-equity ratio of 0.85. The company is considering a new plant that will cost $250 million to build. When the company issues new equity, it incurs a flotation cost of 10%. The flotation cost on new debt is 3%.
a. Calculate the weighted average flotation costs.
b. Calculate the cost of the plant including flotation costs.