Reference no: EM132648536
Beta Inc.'s current (and optimal) capital structure is 40% debt, 10% preferred stock, and 50% common equity. Beta is in the 40% tax bracket. The company can issue up to $20,000,000 in new bonds at par with a 7% coupon rate; any subsequent amount must carry a 2% premium to compensate investors for the added risk. A new issue of preferred stock would pay an annual dividend of $4.00 and be priced to net the company $50.00 per share after the $3.00 per share floatation cost. The firm has $21,000,000 in retained earnings for the current period. Beta's common stock trades at $40.00 per share and the expected dividend on the common stock at t1 is 2.00. Flotation costs on a new common stock issue is $5.00 per share. The company is growing at 7% per year.
A) What is the cost of preferred stock?
B) What is the cost of internal common equity?
C) What is the cost of equity from new common stock?
D) What is the after-tax cost of debt?
E) What is the debt breakpoint in the marginal cost of capital (MCC) schedule?
F) What is the equity breakpoint in the marginal cost of capital (MCC) schedule?
G) What is the WACC, if the firm DOES NOT issue new common stock?
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