Reference no: EM132969035
RWQ Company has 50,000 bonds outstanding. The bonds are selling at 92% of face value, ($1,000) have a 6% coupon rate, pay interest semi-annually. There are 100,000 shares of $5.50 (dividend) preferred stock outstanding with a current market price of $65 a share. In addition, there are 1.30 million shares of common stock outstanding with a market price of $84 a share and a beta of 0.85. The common stock just paid $4.36 in dividends and it is expected to grow by 4% annually. The firm's marginal tax rate is 30%. The stock market risk premium is 9% and the Treasury bill rate is 3%.
1. What is the cost of equity-based on the dividend growth model?
2. What is the cost of equity-based on the security market line? Explain any difference with (1).
3. What is the cost of financing using preferred stock?
4. What is the after-tax cost of debt financing?
5. What is the weighted average cost of capital, using the cost of equity-based (1)? Interpret your answer.
6. Assume the company requires $4,000,000 to fund a new project. What amount must the company raise, if flotation costs are 4% for debt, 6% for common equity, and 7% for preferred equity?
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