Estimate the cost of newly issued common stock

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Reference no: EM131607068

As a Financial Analyst of Falcon Alphine Ski Co. (FAS), you are in charge of estimating the company’s weighted average cost of capital. FAS’s target capital structure is 20% debt, 20% preferred stock, and 60 % common stock. Its current before-tax cost of debt is 12%, and flotation cost for debt can be ignored. Its preferred stock has an after-tax cost of 12.6%. FAS has just paid a dividend (Do) of $2.00 and expects to have a constant dividend growth rate of 8%. Its common stock currently sells for $30 per share. Flotation cost on new common stock would total 10%. FAS’s beta is 1.6. The long-term Treasury-bond rate is currently 7%, and the average return on the market portfolio is 12%. Its tax rate is 40%.

Given the above information, what is FAS’s overall WACC when newly issued common stock is used as the common equity component? Use the Dividend Growth Model (or DCF approach) to estimate the cost of newly issued common stock.

13.56%

16.00%

14.50%

15.25%

16.82%

Reference no: EM131607068

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